"We thank him for his immeasurable work over the past three years and his unquestionable successes (including) promotion to La Liga in 2018," Rayo said in a statement on Monday.
Michel, who enjoyed two spells at Rayo as a midfielder and is considered a club great, was appointed manager in 2017 after first coaching the youth team.
Rayo have been linked with their former manager Paco Jemez in Spanish media reports as they bid to stay in the top flight.
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(Reporting by Rik Sharma; Editing by Ken Ferris)
