The 47-year-old told a news conference on Wednesday that he feels he is no longer the right man for the job, despite a contract supposed to last until 2018.
In a surprise decision, Klopp said it is time for the club to have a change and said he has not decided whether he would take a year out of the game or not.
"I've always said that I would say it if I'm not the perfect coach for this extraordinary club," Klopp told reporters at the emotionally-charged news conference.
Sitting next to him, club CEO Hans-Joachim Watzke and sports director Michael Zorc were close to tears.
"Dortmund need a change. It has nothing to do with the current sporting situation," he said.
"I picked this time for my announcement so as not to create any time pressure as was the case in the last few years with some player decisions."
"I definitely believe this is completely the right decision. Sometimes big heads must roll and today it was mine. There was never any rift with the team."
RESPECT FOR KLOPP
Club officials said they would not talk about possible successors out of respect for Klopp.
Former Mainz 05 coach Thomas Tuchel has been named as a possible successor after Hamburg SV, who were in talks with him, appointed Bruno Labbadia earlier on Wednesday.
Dortmund have had a dismal domestic campaign which saw the 2011 and 2012 German champions battling with relegation until a recent improvement.
Klopp took over at Dortmund in 2008 and as well as the league titles he won the German Cup, challenged Bayern Munich for dominance in the Bundesliga and also reached the Champions League final in 2013, losing to Bayern.
"We, everyone at Dortmund, must now prepare for your departure in the coming weeks, a departure worthy of your achievements," sports director Zorc told Klopp.
Enthusiastic, spontaneous and emotional, Klopp has long been a crowd favourite at the former European champions, helping them restore their position as Bundesliga heavyweights with an exciting brand of attacking football.
But it all began to go wrong this season with Dortmund falling to last place in the Bundesliga before a revival since the turn of the year which has seen them rise to 10th with six matches left.
They were also eliminated by Juventus in the Champions League round of 16 but are through to the German Cup semi-finals, their best chance of a European spot for next season.
Klopp, already being linked with Manchester City where he is favourite with British bookmakers to be their next manager, said he hopes for one last victory parade at Dortmund after the German Cup final.
"I still have one big dream... to drive one more time around the Borsig square with the truck," he said..
Image: Borussia Dortmund coach Juergen Klopp.
Photograph: Getty Images