In an astonishing interview with Italian television, the England manager undermined the FA's decision to strip Terry of the captaincy until his racism trial has been heard in July.
Capello was quoted as saying: 'I completely disagree with the FA about the John Terry decision and I have told that to the chairman.
In the stands: John Terry sat out Chelsea's draw with Manchester United
'I considered and still consider Terry the England captain. I think we first should wait for the trial conclusion.'
Another translation of the interview appeared on Associated Press. 'I spoke with the chairman and I told him that I don't think someone can be punished until it becomes official. The court will decide.
'It's going to be civil justice, not sports justice, to decide if John Terry committed that crime that he is accused of. And I thought it fair that John Terry keeps the captain's armband.'
The FA have made no secret of the fact Capello was unhappy with the decision the board reached without consulting him, with the terms of his contract examined beforehand.
Stand by your man: Fabio Capello (left) says he does not agree with the FA's decision to strip John Terry of the England captain's armband
On certain technical issues the FA board can take such action and it says as much in Capello's contract. But publicly criticising the body who pay him ?6million a year is unlikely to impress the FA board, never mind the challenge to the board when they have considered it necessary to take the moral leadership on a sensitive issue.
FA officials refused to comment as they tried to obtain a recording of the interview, given to RAI at Stamford Bridge on Sunday, to establish if the translation that appeared on the internet was accurate.
Out and about: Capello at a party for the Laureus World Sports Awards at the OXO Tower on Sunday
If Capello still considers Terry the England captain, and it is thought he has indicated as much to the Chelsea defender since the decision to strip him of the captaincy for a second time was announced on Friday, it gives the FA a real problem.
How, for instance, does Capello appoint a replacement with any sincerity and how do other players respond?
How, for that matter, do Capello and the FA continue together when the Italian has undermined the moral stance they have taken?
Capello will be back in his office this week. Talks with FA chairman David Bernstein were already scheduled but now those will take even greater significance.
It will be up to both men to determine if Capello can still continue as England manager for the remaining five months of his contract.
Capello's stance that Terry is innocent until proven guilty has not changed and his advisers checked the terms of his deal once informed by Bernstein on Thursday that Terry's demotion was a fait accompli.
But Capello is at loggerheads with the FA and those talks this week will be crucial to how the Italian and his players move on from an episode that threatens to derail England's summer.