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The Yellow Submarine have only won one and lost three of their opening four league games this season under the former Barcelona manager.
Friday’s 3-1 defeat at Cadiz left Setien’s side 15th in the league heading into the international break.
“The club highlights Setien’s great professionalism and commitment and appreciates him for having taken command in a complicated situation last season,” Villarreal said.
“Under the Cantabrian coach, the team had a great season, promoting many young players from the youth team, and qualified for the UEFA Europa League after reaching fifth place in LaLiga.
“Villarreal CF would like to thank Setien for his work and involvement and wish him the best of luck in his sporting career.”
Villarreal football director Miguel Angel Tena will take interim charge until a new coach is found.
The Valencian club resume LaLiga on Sept. 17 against Almeria before travelling to Greece to face Panathinaikos in their Europa League group opener four days later.
Information from Reuters was included in this report.