Former Juventus boss Marcello Lippi is to succeed Giovanni Trapattoni as Italy coach, and has been handed a contract that runs until the 2006 World Cup.
The announcement came at the end of a meeting of the Italian Football Federation (FIGC) in Rome.
Hours earlier, Italian football league president Adriano Galliani had said that Trapattoni would stay until his contract expired on 15 July.
Trapattoni was widely criticised after Italy's early exit from Euro 2004.
They were eliminated despite two draws and a win in Group C.
They beat Bulgaria 2-1 in their final group game but Denmark and Sweden drew 2-2 and so progressed to the quarter-finals.
Trapattoni, who took over from Dino Zoff four years ago after Italy's defeat in the final of Euro 2000, was unwilling to resign before his contract ran out.
FIGC president Franco Carraro recently said the national team's performance in Portugal was "unacceptable".
According to news reports, Carraro tendered his resignation at the meeting but was asked to stay on.