The 47-year-old had a contract until 2018, but asked to be released early after a poor series of league results left Dortmund bottom of the table in February before climbing to their current position of tenth.
Klopp was the first coach in Borussia’s history to win the german double of domestic league and cup titles.
He steered Dortmund to the 2013 Champions League final, when they lost at Wembley to Bundesliga rivals Bayern Munich, having won the 2011 and 2012 German league titles.
“I always said in that moment where I believe I am not the perfect coach anymore for this extraordinary club, I will say so,” Klopp told a press conference.
He added: “I believe this is the right decision at the right time.
“I have not had any contact with any other clubs, nor have I any plans to take a sabbatical.
“I just wanted to make my decision known now so that the club can plan for the future.
“I chose this time to announce it, because in the last few years, some player decisions were made late and there was no time to react,” he added in reference to Mario Goetze’s shock departure to Bayern Munich in April 2013.
Klopp earned his place in Dortmund folklore by becoming the first coach in Borussia’s history to win the german double of domestic league and cup titles in 2012.
He steered Dortmund to the 2013 Champions League final, when they lost 2-1 at Wembley to Bundesliga rivals Bayern, having won the 2011 and 2012 German league titles.
“It’s very difficult news to take. We’ve had a special relationship and Jurgen will always be remembered by the club,” said Dortmund chief executive officer Hans-Joachim Watzke.
During the press conference the club announced there would be no questions taken about a possible replacement, as they begin looking at their options.
The German has been strongly linked with the Etihad Stadium hot seat this term following the Citizens’ rocky form under Manuel Pellegrini, who has seen his side slip to fourth in the Premier League standings.
Klopp, though, has performed no better with Dortmund this season, with the German giants currently 10th in the Bundesliga after 28 games and already a whopping 37 points adrift of leaders Bayern Munich.
-Additional reporting TeamTalk Media