The 61-year-old received his marching orders after flying to Boston on Monday to hold showdown talks with Liverpool’s owners FSG.
Dalglish masterminded his side’s League Cup success this year - the club’s first trophy since 2006 - but failed to secure a top-four finish having been allowed to invest over £100 millon on new players since he returned to the club in January 2011.
Liverpool ended their Premier League campaign in ninth-place, a worst-ever finish for the club since the formation of the league 20 years ago.
In addition, their points tally of 52 points marked the poorest return since the 1953-54 season when the club were relegated from the old First Division.
The Reds' claimed just six league wins at Anfield all season, the worst record at home in a league season since 1948-49.
Dalglish, along with director of football Damien Comolli, have been criticised for the inflated transfer fees invested during the former's reign.
Andy Carroll, who has scored just six times in 46 appearances, arrived for £35m, before midfield trio Charlie Adam, Jordan Henderson and Stewart Downing, the latter contributing not a single goal or assist from out wide during the entire season, were brought in for a collective fee of around £45m. In a statment on the club's official website, owner John Henry said: "Kenny will always be more than a championship-winning manager, more than a championship-winning star player. He is in many ways the heart and soul of the club. “He personifies everything that is good about Liverpool Football Club. He has always put the club and its supporters first. “Kenny will always be a part of the family at Anfield." "Our job now is to identify and recruit the right person to take this club forward and build on the strong foundations put in place during the last 18 months." Chairman Tom Werner echoed the sentiments put forward by Henry, but reiterated the poor season the Reds suffered and the desperate need to improve sooner rather than later. He added: "Kenny came into the club as manager at our request at a time when Liverpool Football Club really needed him. He didn't ask to be manager; he was asked to assume the role. He did so because he knew the club needed him. “He did more than anyone else to stabilise Liverpool over the past year-and-a-half and to get us once again looking forward. We owe him a great debt of gratitude. "However, results in the Premier League have been disappointing and we believe to build on the progress that has already been made, we need to make a change."