The former Manchester United winger also said he is to retire from football management, after spells with Reading, Manchester City and Crystal Palace.
"I found I could not become passionate about the role and give the commitment the position demands," the 55-year-old told the official club website.
Coppell - who previously stood down from his job at Manchester City after 33 days - was appointed as Bristol City manager in April following the departure of Gary Johnson, but did not take up the reins until the end of the season.
He oversaw just two competitive matches - the opening day 3-0 defeat at home to Millwall and Tuesday's 3-2 loss to Southend in the Carling Cup.
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"I appreciate that the timing of my departure is not ideal, but I believe it is best for the club," added Coppell, who reached the milestone of 1000 league games as a manager last year.
"I am retiring from football management but still feel I have a contribution to make to the game sometime in the future."
Chairman Steve Lansdown said: "Steve's prestigious career as a player, coupled with his experiences and successes as a manager are in no doubt.
"His footballing pedigree made him our prime target to manage the club early this year.
"It is disappointing for any club to part company with its manager at this stage of the season. However, we respect Steve's decision."
Coppell was key to move says James
Coppell managed to persuade England's World Cup goalkeeper David James to drop down to the Championship when he signed the hugely experienced 40-year-old shortly before the start of the season.
Bristol City have quickly appointed 43-year-old assistant manager Millen, who has been at the club since 1999 when he joined as a player, as Coppell's replacement.
"We're delighted to appoint Keith into the role with immediate effect," added Lansdown.
"This was not a difficult decision. He's managed the team on previous occasions, he understands the football club and has great affection and ambition for it.
Watch highlights of Coppell's final game in charge against Southend in the Carling Cup
"I always expected Keith to become a manager one day and now he has the opportunity at Bristol City FC. I look forward to working with him and helping him succeed."
Millen, who has been assistant at Ashton Gate since 2004, said: "I'm excited but I'm still getting over the shock really.
"I knew I wanted to do the job and last season I enjoyed it. For certain reasons I decided to step aside from it and I was looking forward to working with Steve.
"I did enjoy working with him and we are still friends. We met last night, when he told me the news. He apologised for leaving me in this situation.
"You have to be your own man and go with your decisions. The players know, certainly from last year, how I like things working."
Source: BBC Sport
Source: BBC Sport