The 43-year-old, who succeeded Gary Monk in 2019, will remain in charge for the final nine games of this season, with Birmingham currently eight points clear of the relegation zone.
The Spaniard led Birmingham to a 13-game unbeaten run and has been credited with revitalising the club’s playing style, as well as placing trust in prodigious youngster Jude Bellingham.
Birmingham were deducted nine points in March 2019 by the English Football League for breaching profitability and sustainability rules, having incurred losses of £48m between 2015 and 2018.
“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,” Clotet said.
“I’m very grateful to the club and supporters for placing their faith in me to lead the team 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.”