The Italian has only been in charge for 18 months but has been lured back to Los Blancos for a second spell, having previously managed them between 2013 and 2015.
The story has rapidly gathered pace in the last 48 hours, with Real making Ancelotti their number one candidate to succeed Zinedine Zidane after becoming frustrated in their attempts to land Mauricio Pochettino and Antonio Conte.
Ancelotti played down rumours linking him with Real Madrid just a few weeks ago, saying he was settled in England and committed to the Toffees.
However, something has dramatically changed in the last few days and he has today returned to the club with whom he won both the Champions League and Copa Del Rey in 2013-14.
In February, Ancelotti expressed his desire to remain at Everton beyond the expiry of his current deal, which would likely see him lead the club into their new stadium at Bramley-Moore Dock.
But his departure has left Everton in search of their fifth permanent manager in the last four years, following the Italian, Marco Silva, Sam Allardyce and Ronald Koeman.
Early names to be linked with the Everton job include Nuno Espirito Santo, Eddie Howe, Antonio Conte and former Blues boss David Moyes.
Ancelotti leaves Everton having won 31 of his 67 games in charge of the club, a win rate of 46.3 per cent which is the fifth-best in the club’s history and bettered only by Howard Kendall since the 1980s.