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Liverpool have terminated the contract of manager Kenny Dalglish, owners Fenway Sports Group and the club have confirmed.
The announcement comes just 24 hours after the Scot returned from a meeting with principal owner John Henry and chairman Tom Werner in the United States.
Despite winning the Carling Cup and reaching the final of the FA Cup, Dalglish paid the price for a disappointing eighth-place finish in the Premier League.
A 14th defeat of the season at Swansea on the final day of the season condemned the club to their worst league finish for 18 years and their lowest points tally (52) since 1953/54.
"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."
From the moment he was appointed in temporary charge Dalglish insisted he would do whatever was necessary for the benefit of Liverpool.
On departing the club which has been a huge part of his life over the last four decades he said: "It has been an honour and a privilege to have had the chance to come back to Liverpool Football Club as manager.
"I greatly appreciate the work that Steve (Clarke), Kevin (Keen), the players and all of the staff put in during my time and feel proud that we delivered the club's first trophy in six years, winning the Carling Cup, and came close to a second trophy in the FA Cup final.
"Of course I am disappointed with results in the league but I would not have swapped the Carling Cup win for anything as I know how much it meant to our fans and the club to be back winning trophies.
"Whilst I am obviously disappointed to be leaving the football club, I can say that the matter has been handled by the owners and all concerned in an honourable, respectful and dignified way and reflects on the quality of the people involved and their continued desire to move the football club forward in the same way as when they arrived here.
"I would like to thank all of the staff at the club for their effort and loyalty.
"I said when first approached about coming back as manager that I would always be of help if I can at any time and that offer remains the same.
"Finally, I want to put on record my heartfelt gratitude to Liverpool's fans, who have always given me and the club their unwavering support.
"Without them neither the club nor I would have achieved anything."
Werner said they had made a tough decision to remove a man who is held in such high esteem at Anfield following his exploits as a player and manager in his previous spell in charge.
He acknowledged the effect the 61-year-old had had in putting things on a more even keel after a disastrous six months under Roy Hodgson but felt a change was required.
"Kenny came into the club as manager at our request at a time when Liverpool Football Club really needed him," he said.
"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.
"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."
Henry was also fulsome in his praise for the Scot. "Kenny will always be more than a championship-winning manager, more than a championship-winning star player," he said.
"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."
Prior to the start of the season Henry had suggested that Champions League qualification was the minimum requirement.
There had been progress made under Dalglish, who initially took temporary charge in January 2011 with the club dangerously close to the foot of the table after Hodgson failed badly.
The Scot was given a three-year contract a year ago but an inability to sufficiently close the gap to the top four despite a significant outlay on transfers appears to have persuaded Fenway Sports Group a change was required.
Wigan manager Roberto Martinez has been linked with the post while former manager Rafael Benitez, who famously won the Champions League in 2005, reached the final in 2007 and consistently delivered top-four places, is still out of work and living on the Wirral.
In 2009 Benitez came within four points of becoming the first Liverpool manager since Dalglish in 1990 to win the title but he remains a divisive figure among fans and returning to another former manager after dispensing with one might smack of desperation on FSG's part.