The Scot arrived back in England on Tuesday following discussions with the club's owners, and a day later the Reds parted ways with the coach with immediate effect.Liverpool has parted ways with manager Kenny Dalglish.
The Premier League club released an official statement Wednesday, saying "a change was appropriate." The two sides met in Boston earlier this week before the decision was made.
The search for a new manager will begin immediately.
"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," said LFC Principal owner John Henry in a statement.
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 million pounds on new players since he returned to the club in January 2011.
Liverpool ended its Premier League campaign in eighth place, a worst-ever finish for the club since the formation of the league 20 years ago.
In addition, Liverpool's tally of 52 points marked the poorest return since the 1953-54 season when the club was relegated from the old First Division, as the Reds' claimed just six league wins at Anfield all season.
"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," said Liverpool Chairman Tom Werner.
"We are committed to delivering success for our supporters and our ambition remains resolute to return this great Club to the elite of England and Europe, where it belongs."
Dalglish, along with director of football Damien Comolli, have also been criticized for the inflated transfer fees invested during the former's reign.
Andy Carroll, who has scored just six times in 46 appearances, arrived for 35 million pounds. And the midfield trio of Charlie Adam, Jordan Henderson and Stewart Downing - brought in for a collective fee of around 45 million pounds - produced on four goals between them the entire season.