Liverpool confirm Lee exit from Anfield
Lee, who played nearly 300 matches for Liverpool and includes the European Cup wins of 1981 and 1984 among his achievements, returned to Anfield in 2008 to work alongside former coach Rafael Benitez.
The 52-year-old retained his position as assistant in January when Dalglish replaced Roy Hodgson as manager and added Steve Clarke to his staff.
After retiring as a player, he joined the Anfield coaching team in 2003 before helping to coach England and then briefly managing Bolton Wanderers.
"We'd like to place on record our thanks for all of Sammy's hard work over the years and the contribution he has made to Liverpool," Dalglish told the club's website.
Lee, who also won three league titles as a player alongside Dalglish for Liverpool, told the website: "I returned to the club in 2008 and I'm proud of the contribution I've been able to make since then.
Liverpool said in a statement they "will continue to analyse the requirements of their backroom team and will make further announcements in due course."