Graeme Souness quit as Liverpool manager after giving up the struggle to restore the Anfield glory days.
The 40-year-old admitted he had found the task more difficult than expected.
There was no announcement about a successor but chairman David Moores said: "We intend to resolve this matter quickly and hope to make an announcement very shortly."
Souness gave up the fight after 33 eventful months at Anfield during which he was involved in 30 million pounds worth of transfer business.
But his wheeler-dealing failed to pay dividends and for the second successive season Liverpool are out of the hunt for trophies.
The 1-0 FA Cup exit at home to Bristol City on Tuesday was probably the final straw for Souness.
Souness was not at the news conference at which the announcement was made, but the club issued a statement on his behalf, saying: "This is a sad day for me. After a great deal of soul searching I have reached the conclusion that the best thing for the club and I is that we should part company."
"I took this job believing that I could return the club to its former glory but this proved to be more difficult than I anticipated. The fans have been very patient but I feel that their patience is now running out. Liverpool Football Club has, and always will have, a very special place in my heart and I can only wish the club well and every success in the future. I wish to thank the chairman, the board and everyone else associated with the club for their help and support which they have given me during my term as manager."
Souness earlier met the board to discuss his future and Moores said that his resignation had been unanimously accepted. Souness still had two-and-a-half years of his five year contract to run but he and Liverpool have reached a financial agreement.
Moores said: "Amicable arrangements have been made. It is a very sad day for everyone at Anfield. We have all enjoyed Souness' enthusiasm and friendship."
He spoke of Souness' personal difficulties including the death of his father and massive heart surgery and the unprecedented number of injuries the club had faced while he was in charge.
This, he said, had forced them to bring in young players much more quickly then was usual at Anfield.
"Liverpool Football Club is all about winning things and being a source of pride to our fans," added Souness.
Liverpool won the FA Cup in Souness' first season in charge but Moores added: "The results have been well below what is expected by the club and its supporters."
"Everyone will have their own view on this. Both Graeme and the board have accepted the position and taken the action they feel is right."
He paid "very warm and sincere tributes" to the fans who had continued to support the club magnificently though they had obviously been unhappy with the results.
"For 25 years Liverpool were Britain's most successful and consistent football club. For four of those years we were also the most successful club in Europe. No one has an automatic right to success but you can be sure we will all be doing everything in our power to achieve those levels again. We owe that both to our own supporters and our own history."
It was widely anticipated that assistant manager Roy Evans would be appointed to replace Souness at least until the end of the season.
But Liverpool's failure to confirm him as the new boss will lead to speculation that they will be looking to bring in a manager from outside.
Graeme Souness fact file
Born : Edinburgh, May 6 1953.
1968 : Joined Tottenham as an apprentice.
1972 : Moved to Middlesbrough.
1973 : Debut - went on to make 176 League appearances.
1975 : Made debut for Scotland.
1978 : Signed for Liverpool for 350,000 pounds. Made 247 League appearances for Merseysiders, winning five League championships, three European Cups and four League Cups.
1984 : Sampdoria stepped in with a 650,000 pound offer.
1986 : Wins last of 54 caps for Scotland. Returned from Italy to join Glasgow Rangers as player-manager for 300,000 pounds.
1986-1991 : Led Rangers to three League titles and four SKOL Cup wins.
1991 : Returned to Liverpool, this time as managerial successor to Kenny Dalglish.
1992 : Entered hospital for triple heart by-pass surgery 24 hours after FA Cup semi-final draw against Portsmouth. Liverpool went on to beat Sunderland at Wembley with Souness there to watch them triumph.
1993 : Souness hit out at players after FA Cup third round defeat by Bolton ended their season. Club went on to suffer worst season for 30 years.
1994 : Calls for Souness' resignation after FA Cup third round defeat at home to First Division Bristol City.
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