"Both parties thought it in the best interests of the club that he stand down," said American owner John Henry in a statement on the club's website.
Hodgson, 63, had won only seven of their 20 Premier League games since he took over from Rafael Benitez in July 2010 with the club 12th in the table.
Former player and manager Kenny Dalglish, who wanted the position initially and has been hovering around like a spectre, has now been placed in charge of Liverpool until the end of the season.
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