Clotet has decided to step down and the Club has agreed to allow the 43-year-old to explore other coaching opportunities.
Dong Ren, Blues CEO, said: "Pep will depart with our very best wishes.
"Pep came in as a colleague but he will leave as a friend with our gratitude.
"He has done a very good and thorough job for us and has been professional throughout, always putting the Club before himself.
"It's a decision that is filled with sadness for us both. We value Pep very highly and we know how much he loves this Club.
"In the meantime, Pep continues to have our full backing and we are all determined to do everything we can to finish the season strongly and give him the fitting send-off he deserves."
Clotet commented: "It's been a really difficult decision to take because it's a privilege to be part of the Blues family, but it's the best step for everyone and it allows the Club to continue to move forward with their vision and strategy.
"I'm very grateful to the Club, its board and the supporters for placing their faith in me to lead the team this season and to face up to the challenges involved in what's been a key transition under really demanding circumstances.
"We were set the objective of bringing stability to the Club, promoting our Academy and instilling a different playing style and, thanks to the togetherness that everyone has shown, we have been able to successfully move in that direction.
"It's now time for us to focus on the remainder of the season and for the Club to continue building on these foundations."
Clotet joined Blues in March 2018 and has been an influential figure since.
Clotet was appointed Caretaker Head Coach in June 2019 before becoming Head Coach in December after impressively helping to oversee a gradual shift in approach by the team to a more possession-orientated and attacking style.
Although this was never going to be a straightforward overnight task, the evidence and statistics all show a positive upward trend: for example, Blues have improved their possession and use of the ball, shots per game and overall win percentage.
Clotet has assisted the implementation of a significant commitment to youth, which will become increasingly important in the near future as the football landscape changes.
Under Clotet, six Academy products have made their senior Blues debuts this season including Jude Bellingham, who created history by becoming our youngest ever player.
The average age of the starting eleven has come down to 26.
Blues went on a 13-game unbeaten run before football was suspended due to COVID-19 and Clotet and his backroom staff have worked diligently during lockdown and in the return to training since to prepare the side for a resumption of action on 20 June.
The Club will make no further comment at this time.