The Premier League club said the Centenary Stand would be renamed later this year, on a date to be determined, in the 66-year-old Scot's honour to mark Liverpool's 125th anniversary.
"It is testament to Liverpool’s history and status that we are not lacking in truly great individuals, whose names could easily grace a stand at Anfield," said principal owner John W Henry in a statement on the club website (www.liverpoolfc.com).
"But in Kenny Dalglish we have a person who carries such immense significance to the fabric of this club, so it feels somewhat incumbent on us to recognise this in a manner that is befitting to the man."
Henry added that Dalglish, now a non-executive director, was unique having achieved "greatness" as a player and enjoying such success as a manager.
"However, Kenny’s contribution to Liverpool goes beyond goals scored, points amassed and silverware placed in the cabinet," Henry said.
"His values are Liverpool’s values – he represents what is best about this football club."
Dalglish joined Liverpool from Celtic in 1977 and made 515 appearances, scoring 172 goals. He also served two terms as manager.
"King Kenny" won eight league championships, three European Cups, two FA Cups, five League Cups and one UEFA Super Cup in his career at Anfield.
He also played a leading community role in the aftermath of the 1989 Hillsborough disaster, attending funerals and meeting the bereaved after 96 Liverpool fans were crushed to death at the Sheffield stadium before an FA Cup semi-final against Nottingham Forest.
"The leadership and solace he gave to individuals, the club and city as it tried to come to terms with the trauma and tragedy of Hillsborough transcended sporting achievement," said Henry.
"His name is synonymous with our club, with our home and the city of Liverpool. Now it will be as visible as it is palpable."
(Reporting by Alan Baldwin, editing by Ed Osmond)
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