Sven-Goran Eriksson will quit as England coach following this summer's World Cup finals.
Eriksson's future has been subject to speculation in recent days
Eriksson, 57, who took over in January 2001 and will leave two years before the end of his contract, met Football Association officials on Monday.
He said: "I am happy we have reached this agreement and can now continue our preparations for the World Cup.
"It is important to stress how committed I am to success this summer. Let's go and win the World Cup."
Sam Allardyce 5/2
Alan Curbishley 3/1
Steve McClaren 7/2
Ottmar Hitzfeld 8/1
Martin O'Neill 10/1
Steve Bruce, Luiz Felipe Scolari, Guus Hiddink, Stuart Pearce 12/1
Sir Bobby Robson 16/1
Sir Trevor Brooking, Bryan Robson, Paul Jewell 20/1
Fabio Capello, Jose Mourinho 25/1
Arsene Wenger, Gerard Houllier 33/1
Peter Taylor 40/1
Harry Redknapp, Sir Alex Ferguson, Alan Shearer, Sammy Lee 66/1
Kevin Keegan 100/1
Odds provided by Ladbrokes on 24/01/06
A compensation deal has been agreed on the Swede's £4m-a-year contract, which was due to run out in 2008.
The amount of compensation has not been revealed by the FA - but reports suggest Eriksson could receive up to £3m.
News of the termination of Eriksson's contract followed six hours of talks between the coach and his FA bosses at their Soho Square headquarters on Monday.
It had been widely reported that Eriksson was seeing the FA to discuss the latest revelations in the News of the World - but the real purpose of the meeting became clear in a dramatic announcement at 2145.
In his statement the England coach said: "I know that I have the full support of the players and the FA.
"I care passionately about this job and I want everyone to know that.
"I have always enjoyed the incredible support of the fans and I know how important they will be to us in Germany."
Eriksson has come under increasing pressure following an interview with an undercover reporter from the News of the World.
The latest reports, published on Sunday, quoted him as saying that some unnamed managers "put money in their pocket" when involved in transfer deals.
The "fake sheikh" revelations were the latest in a long line of controversies that have dogged Eriksson since he took over from Kevin Keegan in 2001 - including stories linking him to jobs at Manchester United and Chelsea
FA chief executive Brian Barwick said: "The FA and Sven felt it was important to clarify his future.
"There has been so much speculation surrounding this matter in recent weeks and months, it was important to resolve it now.
"This is the right outcome and I would like to thank Sven and his advisors for their tremendous co-operation.
"Our main objective is giving Sven and the England team the best chance of achieving success at the World Cup and Sven is definitely the man to lead us in Germany."
Eriksson was watching West Ham play Fulham on Monday when the announcement was made at Soho Square.