Athletic director Jeff Bourne announced the move Monday, two days after the Dukes lost 28-17 to Towson to finish 6-6. It was their second loss in a row and fourth in five games. James Madison also will miss the playoffs for the fourth time in the past five seasons.
Matthews, 60, led James Madison to the 2004 FCS national championship and had one year remaining on his contract.
The change comes at a time of uncertainty for James Madison, which in early October announced the results of a feasibility study on whether the athletic programs should seek to move to the FBS level. The study made no recommendations, but said the school has the facilities in place to make the move. The university said it was seeking input from supporters in releasing the results.
Matthews' record at James Madison was 109-71. A year after the Dukes won the championship, the school opened the $10 million multipurpose Plecker Athletic Performance Center, with locker rooms, weight room and numerous other sports medicine, academic support and entertainment facilities in the south end zone.
In 2011, James Madison completed a two-year, $62.5 million expansion of the stadium that added suites and boosted its seating total to nearly 25,000 and sparking talk that a move to the FBS level was coming.
Those facilities, Bourne said, should aid the school in its national search for Matthews' successor.
"We have everything in place, including outstanding facilities, resources and support operations, to regularly compete for a conference championship and postseason play," Bourse said in a school release.
Matthews did not return a phone message left at the football office Monday.
Matthews, who was hired in 1999, led James Madison to two of the biggest victories in program history -- a 31-21 triumph against Montana for the 2004 title, and a 21-16 victory against No. 13 Virginia Tech at Lane Stadium on Sept. 10, 2010, that made the Dukes just the second FCS team to beat a ranked FBS team.
Matthews called the win against the Hokies "the biggest victory of my professional career," but the Dukes couldn't sustain the success. They split their remaining 10 games in the regular season and missed the playoffs.
James Madison won 12 games in the 2008 season, reaching the national semifinals, but since then have managed three six-win seasons, one with seven and one with eight and was 1-1 in the 2011 playoffs.