He returned home on Tuesday from a shot trip to the United States, where he met representatives of Fenway Sports Group, which owns the Merseyside club.
Despite winning the Carling Cup in March and leading the club to the FA Cup final against Chelsea earlier this month, the Scotsman has been under pressure after a poor Liverpool league season which saw them finish lower than at any time in the last 18 years, with their worst points tally since 1953/54.
When he was first appointed he was told that Champions League qualification – a fourth place finish or above – was the minimum requirement.
Dalglish has been criticised for his lavish spending in the transfer market on players who have not always delivered. He also came under fire for his handling of the Luis Suarez affair, which culminated in the Liverpool striker being found guilty by the FA of racially abusing another player.
“Fenway Sports Group and Liverpool Football Club announce that Kenny Dalglish is to leave his post today as manager after having his contract terminated,” said a joint statement.
“After a careful and deliberative review of the season the club came to the decision that a change was appropriate.It is not a decision that was reached lightly or hastily.The search for a new manager will begin immediately.”
Sacking Dalglish is a risky move by FSG. He is revered by fans because of his long relationship with the club, first as a player and later as a manager, and is often described as Liverpool’s best ever player.
As a player, he won five First Division titles, three European Cups and four League Cups. As player-manager, he won three First Division titles and two FA Cups.
FSG chairman Tom Werner paid tribute to Dalglish, saying he had done more than anyone to stabilise the club in recent months and was owed “a great debt of gratitude”.
But Mr Werner added that results in the Premier League had been “disappointing” and change was needed so Liverpool could return “to the elite of England and Europe, where it belongs”.
The departures of Liverpool’s director of football Damien Comolli, and of Peter Brukner, head of sports medicine, were announced in April. Last week FSG said Ian Cotton, the club’s director of communications, was also leaving.