The Scottish boss recently travelled to the United States of America to meet with the club's owners, where it is believed that his future at Anfield was discussed.
It has now been revealed that following those discussions the Fenway Sports Group have decided that Dalglish has taken the club as far as he can.
"Kenny came into the club as manager at our request at a time when Liverpool Football Club really needed him," said chairman Tom Werner. "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 stabilize 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. "
His dismissal has brought an end to his second stint in charge of the club, having spent six years at the helm up until 1991.