Dalglish, 61, was in his second spell with the club after taking over from Roy Hodgson in January 2011. He also managed the team from 1985-91.
Liverpool announced the move Wednesday after rumors had spread quickly across the web.
Fenway Sports Group (FSG) and Liverpool Football Club announced that Kenny Dalglish is to leave his post today as Manager after having his contract terminated.
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.
Liverpool finished eighth in the English Premier League this past season after spending heavily in the summer.
With Dalglish out, here are six possible replacements.
Wigan's impressive escape act this spring in the English Premier League relegation fight earned their Spanish manager, Roberto Martinez, rave reviews.
Martinez, 38, is seen as a rising star, and he was linked with the Liverpool job even before Dalglish's sacking.
What's more, he seemed interested:
We cannot control speculation and I am not going to lie to you, I like the speculation. I see it as a real compliment. Speculation will follow a team - you get good speculation and bad speculation.
The speculation I don't like is when it suggests you are going to lose your job after a couple of defeats. I am proud and happy that the club are attracting a lot of good headlines and stories.
Liverpool fans weren't as enthusiastic.
Laurent Blanc, currently the manager of France, has suggested he could leave Les Bleus after Euro 2012.
Blanc, 46, led Bordeaux to the Ligue 1 title and a Coupe de la Ligue crown in 2008-09.
Fabio Capello resigned as England manager in February after a controversy involving captain John Terry.
Since then, the 65-year-old Italian has expressed the desire to take on "one more challenge." Because he knows so much about the English game from his time as England manager, managing a Premier League club would make some sense.
From the BBC:
England would be very interesting for me because I know very well the teams and the players
I want to manage a team that wants to win something, if possible.
Andre Villas-Boas was sacked by Chelsea after less than a year on the job, but at 34, Villas-Boas is still young.
And while Chelsea owner Roman Abramovich ran out of patience quickly, AVB has already won a Europa League title in his brief career.
AVB could still be a success in the Premier League, given time and the full support of a club, and he has been linked to the Liverpool job.