Lippi, who led Italy to the 2006 FIFA World Cup™ in Germany before he resigned, has been linked with the position following the penalty shoot-out defeat to Spain in Vienna and returned to the role following a meeting with Italian FA, (FIGC) president Giancarlo Abete.
Since the victory in Berlin, Lippi has not accepted any of the numerous roles offered to him, preferring to work for Sky Sports Italia and recharge his batteries on the Tuscan coast.
The ex-Juventus coach will be officially unveiled on Tuesday 1 July.
Donadoni had his tenure ended after the FIGC decided not to renew his two-year contract following their exit from EURO 2008 at the quarter-final stage.
Abete met with Donadoni in Rome on Thursday where he told the 43 year-old of their decision.
"In confirming to Donadoni his sincere personal gratitude and appreciation for the knowledge and professional manner in which he conducted himself during his time as coach to the national team, President Abete also let the coach know the FIGC's decision to end their relationship at the termination of his contract," read a statement on their website.
Donadoni's reponse to the announcement was brief and he continued to rue his side's luck in losing by penalty shoot-out to Spain.
He replied: "I am sorry that a penalty kick determined this situation. In the two years my Italy also made positive strides, which the last match cannot remove."
Donadoni initially dithered, then eventially signed a contract extension prior to EURO 2008, but it was dependent on Italy reaching the semi-finals and he refused to resign in the wake of their loss to Spain, saying:
"Resign? The thought never even entered my brain. I don't have a reason, we only lost a game on penalties. You can't say things went well when you win, but don't work when you lose on penalties. We will talk and decide. It doesn't make any sense to talk about whether I decide to carry on or not."
Since the team returned from Austria and Switzerland there has been constant press specualtion that Donadoni would be removed from his position and Abete was conspicuous in his refusal to grant the coach a vote of confidence.
Earlier in the week Abete had said; "It is positive in terms of the quality of the group of players and I am delighted by the great bond created in the group. But we are aware that our overall capacity and skills have not matched the level we expected."
Then today he announced to La Gazzetta dello Sport that, "the contract is extinct."
Donadoni will no doubt look back and rue his luck. Firstly captain and defensive lynchpin Fabio Cannavaro was ruled out of the tournament with a knee injury, then in the quarter-final with Spain key midfielders Andrea Pirlo and Gennaro Gattuso were suspended and badly missed.
However, he was badly let down by his strikers, all six of whom failed to find the net, with all three goals scored coming from set-pieces.
FIGC will now set to work negotiating a compensation pay-off deal with Donadoni, with estimates putting the figure around the 550,000 euro mark.
Italy's next game is a friendly with Austria in Nice on August 20, with their opening FIFA World Cup 2010 qualification match against Cyprus on 6 September in Nicosia, followed by a home fixture against Georgia on 10 September.