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The 26-year-old, who has been at the club since he was six, is out of contract on 30 June and is expected to join Real Madrid.
"After 20 years at Liverpool Football Club, now is the time for me to confirm that I will be leaving at the end of the season," Alexander-Arnold announced on social media.
"This is easily the hardest decision I've ever made in my life."
Alexander-Arnold is one of three high-profile players whose deals at Anfield run out this summer, but while Mohamed Salah and Virgil van Dijk have signed fresh contracts in recent weeks, Alexander-Arnold will leave.
The Liverpool-born defender has made 352 appearances and scored 23 goals for the club since making his debut in 2016.
He has helped them win this season's top-flight title under Arne Slot and also won the Premier League under the Reds' former manager Jurgen Klopp in 2019-20.
His other trophies with Liverpool also include the Champions League in 2018-19, the 2022 FA Cup and two League Cups.
"This club has been my whole life – my whole world - for 20 years," added Alexander-Arnold.
"From the academy right through until now, the support and love I have felt from everyone inside and outside of the club will stay with me forever. I will forever be in debt to you all.
"But, I have never known anything else and this decision is about experiencing a new challenge, taking myself out of my comfort zone and pushing myself both professionally and personally."
Liverpool said Alexander-Arnold "will depart with our gratitude and appreciation for his contribution during a sustained period of success".
'Now is the time to tell fans the truth'
The contracts of Salah, Van Dijk and Alexander-Arnold have been a major talking point during Slot's first season in charge, with the Dutchman regularly being asked about their futures.
Salah announced he was staying on a new two-year deal in April and was followed by Van Dijk agreeing similar terms the following week.
However the speculation about Alexander-Arnold continued and, while Slot praised the defender on 18 April and said his future was still "not done", Alexander-Arnold said he had waited to announce his decision as Liverpool had now secured their 20th top-flight title.
"Obviously there's been a lot of noise around what the decision was going to be and how that was going to look," said Alexander-Arnold.
"I know a lot of people will say I should have said sooner, a lot of people will say maybe I waited for the right time. But I felt personally the focus should always be on the pitch, should always be about the football.
"When we were in a title race and trying to push for trophies, it's about making the right decision for the team and trying not to distract the team and take away from what we're doing on the pitch.
"Now that we've won the league and we've been able to celebrate it and celebrate such an amazing achievement, I felt like now is the right time to get it off my chest and tell the fans the truth, and now is that time."
'Lure of Real hard to resist' – analysis
The biggest unkept secret in English football is finally confirmed: Trent Alexander-Arnold is leaving Liverpool after 20 years at his boyhood club.
What happens next will hardly be a bombshell revelation either.
Barring a drastic turn of events, the defender will join Real Madrid on a free transfer in the coming weeks following months of discussions with the Spanish giants.
It's the lure of a new challenge - the prestige of becoming a Galactico - that is the overriding motivation for Alexander-Arnold.
Indeed, while he will undoubtedly be well remunerated in the Spanish capital - with well-placed sources indicating his basic wage in Madrid will be supplemented by a healthy commercial and image rights package - Liverpool were willing to make Alexander-Arnold one of the best-paid defenders in Premier League history to sign a new contract at Anfield.
But you get the impression that money isn't the sole driver for Alexander-Arnold.
He's won everything there is to win with Liverpool. He is going out a winner, too; playing a key role in the club's 20th league title triumph. Winning at Real Madrid puts you on different stratosphere, though.
The lure of Real, even for someone as emotionally attached to his surroundings as Alexander-Arnold is, is hard to resist.
Alexander-Arnold, upon his exit, will relinquish the vice-captaincy - a role Mohamed Salah is understood to be a prime candidate to fill for next season.
Leaving home will carry an emotional burden but a new challenge is on the horizon for Alexander-Arnold.
Madrid is calling.
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