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Under 19 coach Julen Lopetegui will now fill the 46-year-old's shoes and step up to take the reins of the U21s.
The former Spain international had led his nation to victory at the 2011 European Under 21 Championships, but a little over 12 months later it was a different story as La Roja were eliminated without scoring a single goal in a group that also included Morocco, Honduras and Japan.
In an official statement issued on Tuesday, the Spanish Football Federation (RFEF) moved swiftly to remove Milla from his position and confirmed the contract of his assistant, Juan Carlos Martinez Castrejo, would also not be renewed.
His replacement will take charge of the U21s for an upcoming fixtures against Switzerland on Sept. 6 and Croatia on Sept. 10.
Lopetegui led his side to back-to-back victories at the Under 19 European Championship in 2011 and 2012 and the quarterfinals of the 2011 Under 20 World Cup.