Alex McLeish has resigned as Scotland manager.
Scottish Football Association chief executive Gordon Smith confirmed that McLeish submitted a written resignation this afternoon.
The 48-year-old is expected to be unveiled as the new manager of Birmingham tomorrow.
Smith said: 'We are very disappointed to lose Alex as our manager.' Scottish FA president George Peat said in a statement: 'It is with regret that I can confirm that Alex McLeish has notified the Scottish FA that he has resigned from his position as national team coach with immediate effect.
'I am disappointed that Alex has chosen this course of action.
'He is an outstanding manager who has done a fantastic job with the national team.'
Chief executive Smith and president Peat had been involved in talks with McLeish during their trip to Durban for Sunday's 2010 World Cup qualifying draw, and hoped he would agree an improved new contract.
His deal was due to expire after the 2010 World Cup.
The former Rangers boss steered Scotland close to qualification for the Euro 2008 finals, with their hopes finally shattered by Italy's 2-1 win at Hampden 10 days ago.
However McLeish, on his arrival back in Britain, decided his future was not with the Scotland team.
The World Cup qualifiers begin next season and the lack of competitive games in the coming months may have been a factor in McLeish's decision to quit.
Peat said: 'Everyone at the SFA and indeed Scotland fans around the world were looking forward to Alex leading us into the World Cup qualification campaign.
'This is why we chose to offer Alex an extended contract while we were in South Africa.
'Sadly, he has chosen not to take up this offer.
'A special meeting of the SFA board will take place tomorrow morning at 11am to discuss the current situation.'
Chief executive Smith was still waiting for the chance to speak to McLeish about the resignation.
'He's not said anything, he's sent a written resignation,' Smith told PA Sport.
'We were sitting down at this stage and had broached increasing his deal time-wise and financial-wise.
'He has been a terrific manager for Scotland and a great asset to the association.
'He's also been working in other aspects within the SFA, and he's a big loss.'
Tomorrow's meeting of the SFA board had been called to discuss McLeish's future.
However Scotland's future without the 48-year-old will now rise to the top of the agenda.
'The meeting tomorrow has probably lost a bit of its impact,' said Smith.
'I didn't think we'd be dealing with this today.
'It's one of those things. It's market forces these days, and the Premier League is where lots of guys want to be.'
McLeish had carefully managed the speculation which began almost immediately after Scotland's defeat to Italy.
He insisted in Durban that it was 'absolutely crazy' for people to be backing him as the next Birmingham boss at such an early stage.
However McLeish did admit a Premier League job would be 'attractive ... in the long term'.
It has apparently come sooner than he dared to suggest, and he is set to be unveiled by Birmingham at a press conference at 10.30am tomorrow.
Smith accepted that Scotland's success under McLeish had come at a price.
Smith told Sky Sports News: 'Alex was doing a very good job and when a job became available there was speculation that he would be interested. It was a mixture of those things.
'What happened was we got an offer from Birmingham to speak to Alex and we rejected that.
'There was then a discussion on the matter and this is what has happened today. What has happened was a surprising thing as it moved on to another level.'
Birmingham received £3million from Wigan for the Latics taking manager Steve Bruce.
Smith said: 'We'll take that £3million! That would be very fair.'
The SFA and Birmingham must now reach a financial agreement to indemnify Scotland for their loss.
'There will be compensation and I think it would be substantial,' said Smith.
The SFA considered Gary McAllister for the position in January, after Walter Smith resigned to embark on a second spell as manager of Rangers.
However McLeish was always the front-runner and was installed on January 29.
Former Scotland midfielder McAllister could become a contender again, as could axed Derby boss Billy Davies, Scotland legend Graeme Souness, Motherwell manager Mark McGhee and Dundee United boss Craig Levein.
One bookmaker made McAllister the early favourite.
Gordon Smith took up his role as chief executive on July 1 and has enjoyed working with McLeish in the months since his appointment.
Scotland looked well on track to reach the Euro 2008 finals following victories over France in Paris and Ukraine in Glasgow.
But defeats to Georgia and Italy ended their hopes, and cost the team the services of their manager.
SFA chief Smith told Sky Sports News: 'If no-one comes in for your manager it is because he's not doing that well.
'If he's not doing that well, the team suffers as a consequence.
'We'd like to tie these people up but even a contract doesn't matter that much when a really attractive club comes in.'
Smith's predecessor David Taylor was the man who brought in McLeish.
Now Smith wants to recruit the next manager in as quick as possible.
'There's no major game until next year but I would like to get someone in place before that,' he said.
'There will be names mentioned along the way and we'll have a look at the names in the coming days and make a decision after that.'