"Mauricio Pellegrino is the new coach of Valencia for the next two seasons," Valencia said in a statement on their website.
Emery had long been expected to leave at the end of the campaign after leading Valencia to third place in La Liga, behind Real Madrid and Barcelona, and automatic qualification to the Champions League for the third year in a row.
Pellegrino, 40, was a centre-back in the Valencia side that won the La Liga titles in 2002 and 2004, when they also lifted the UEFA Cup. He later worked as assistant to his coach from that time, Rafa Benitez, at Liverpool and Inter Milan.
Emery, 40, joined Valencia from Almeria in 2008 but has never managed to completely convince skeptical fans despite working in exceptionally difficult circumstances.
The east-coast club have been struggling with crippling debts and have had to sell key players, such as Spanish internationals David Villa to Barcelona, David Silva to Manchester City and Juan Mata to Chelsea.
Emery has constantly rebuilt the side and made it the third best in Spain the last three years, leading them to the semi-finals of the King's Cup and the Europa League this time round.
With one game left, away at Real Sociedad, they lie 29 points behind second-placed Barcelona but six ahead of fourth-placed Malaga.
Pellegrino joined Valencia as a player from Barcelona in 1999 and spent five-and-a-half seasons with them.
As well as their league titles, he helped them to reach consecutive Champions League finals, missing the decisive penalty in the shootout after extra time against Bayern Munich in their second appearance in 2001.
He started his coaching career with Valencia's youth academy before joining Benitez at Liverpool and later following him to Italy. It will be his first top-flight coaching role.
