Rafael Benitez has left Liverpool by mutual consent after six years as manager.
The club have agreed a compensation package with the 50-year-old after a turbulent 2009-10 season.
Liverpool, having begun the campaign among the title favourites, finished a disappointing seventh in the Barclays Premier League and were eliminated from the Champions League at the group stage.
The Premier League result represented an alarming slide for the club after a runners-up finish the previous season.
Benitez, who memorably led the Reds to Champions League glory in 2005, told the club's official website, www.liverpoolfc.tv: "It is very sad for me to announce that I will no longer be manager of Liverpool FC.
"I would like to thank all of the staff and players for their efforts.
"I'll always keep in my heart the good times I've had here, the strong and loyal support of the fans in the tough times and the love from Liverpool.
"I have no words to thank you enough for all these years and I am very proud to say that I was your manager.
"Thank you so much once more and always remember: you'll never walk alone."
Benitez succeeded Gerard Houllier in 2004 and earned a place in Anfield legend with European success in his first season.
He followed that with FA Cup victory in 2006 and another Champions League final appearance 12 months after that, but the Premier League title remained elusive.
The past year has been particularly chastening and he failed to deliver on his "guarantee" of a top-four finish.
That has left the club without Champions League football next season and with club debts of £351million, the board are anxious to give the team fresh impetus.
Chairman Martin Broughton said: "Rafa will forever be part of Liverpool folklore after bringing home the Champions League following the epic final in Istanbul but after a disappointing season both parties felt a fresh start would be best for all concerned."
Liverpool will now begin the search for a successor but say no timescale has been put on an appointment.
Former Reds boss Kenny Dalglish, now an academy ambassador at the club, will assist managing director Christian Purslow to identify candidates.
With owners Tom Hicks and George Gillett looking to sell Liverpool, Dalglish himself has been suggested as a possible cheap, short-term option.
However, the likes of Roy Hodgson, Martin O'Neill and Guus Hiddink have already been heavily touted.
Reports the end of Benitez's reign was imminent began to appear last night but it was thought the financial situation could prove a sticking point.
Benitez signed a five-year contract in March 2009 and it was understood immediate termination could cost the club £16million.
That a compromise has been reached quickly, however, will now allow Benitez to seek immediate re-employment elsewhere.
The former Valencia boss, linked with Real Madrid and Juventus in recent months, is now being tipped as a potential successor to Jose Mourinho at European champions Inter Milan.