CSKA were knocked out in the quarter-finals of the Bulgarian Cup on Wednesday, losing 5-3 on penalties at home to Pirin Blagoevgrad following a 1-1 draw after extra time.
"We have decided to release Dimitar Penev because we want CSKA to win the league title," CSKA's chief executive Ventsislav Zhivkov told a news conference.
The Bulgarian championship resumes on Friday after the winter break with CSKA second in the standings one point behind bitter city rivals Levski.
The 63-year-old Dimitar Penev, named the Balkan country's coach of the century, steered Bulgaria to the semi-finals of the 1994 World Cup in the United States and to their first European Championship finals in 1996.
"We want to thank him (Dimitar Penev) for his contribution and for all his efforts and professionalism," Zhivkov said.
His nephew Luboslav, who formed a formidable international partnership with Hristo Stoichkov in the 1980s and 90s, became assistant coach of the national team last August but resigned a day after coach Plamen Markov's sacking in December.
During his playing career, Lubo Penev, 42, scored more than 150 goals in the Spanish league playing for Valencia, Atletico Madrid, Compostela and Celta Vigo.
CSKA, Bulgaria's most successful club with 31 league titles, were banned from the Champions League last June after failing to meet licensing criteria because of debts to the state and creditors.
