Liverpool have terminated Kenny Dalglish's contract, owners Fenway Sports Group and the club confirmed last night.
The announcement comes 24 hours after the manager returned from a meeting with the principal owner John Henry and the chairman Tom Werner in the United States.
Dalglish paid the price for failing to close the gap on the top four, with Liverpool finishing eighth despite significant investment on players.
"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."
Roberto Martinez, the Wigan Athletic manager, and former boss Rafael Benitez are the early favourites to fill the position.
The 61-year-old Scot led Liverpool to League Cup success and the FA Cup final in his second stint in charge, but he came under pressure for his side's finish in the Premier League, 37 points behind champions Manchester City.
It was seen as a poor return on the millions spent on new players last summer, while Dalglish was also criticised for defending Luis Suarez after the Liverpool striker was found guilty of racially abusing Manchester United's Patrice Evra.
Dalglish flew to the United States on Sunday to present his end-of-season review to principal owner John Henry and chairman Tom Werner, who had only last month given the Liverpool legend his backing.
Indeed, Dalglish's position seemed to have been strengthened when French director of football Damien Comolli abruptly left the club on April 12, having apparently taken the blame for Liverpool's poor results.
Dalglish and Comolli had come under the spotlight for the perceived failures of big-money signings Andy Carroll (£35 million; Dh205m), Stewart Downing (£20m) and Jordan Henderson (£16m).
Liverpool fans were not happy either that in finishing eighth they ended the season below city rivals Everton, who operate on a shoestring budget by comparison.