Felix joined Milan in January in a straight loan and kicked off his spell impressively.
However, the Portugal attacker's form has fallen away, leaving Milan coach Sergio Conceicao unimpressed.
After defeat at Bologna last week, Conceicao said of his countryman: "He can't stay away from the goal and sometimes he moves in areas he shouldn't..."
Days later, Conceicao dropped Felix from his starting line-up for the clash with Lazio.
La Gazzetta dello Sport says Milan management have seen enough and put a line through Felix as a potential permanent signing. Instead, he will be cleared to return to parent club Chelsea at the end of the season.