According to The Guardian:
Negotiations between Anfield officials and the former Internazionale coach have advanced significantly since Hodgson's return from commentary duties in South Africa, to the extent that only the specifics of his Liverpool contract have now to be resolved. Liverpool are happy to meet the £2.5m compensation fee payable to Fulham under the terms of Hodgson's 12-month rolling contract at Craven Cottage.
As well as Hodgson, the former Real Madrid and Villarreal coach, Manuel Pellegrini, and Marseille coach Didier Deschamps have all been linked with the Liverpool vacancy. Club legend Kenny Dalglish, who has been involved in the managerial search alongside Liverpool's managing director, Christian Purslow, made it known that he wanted the job in the absence of better qualified candidates. However, the Liverpool board wanted a manager who has been working in the game.
Deschamps, whose presence on the Liverpool short-list was revealed last week by the Marseille president, Jean-Claude Dassier, today signed a one-year extension to his contract with the French champions. "After the season that we have experienced there is still work to do," said Deschamps, who is now under contract at Stade Vélodrome until 2012. "A great club asked me. I am very flattered but if I ask for respect from my players the least I can do is to be comparable in my commitment to the club. I owe it to the OM."
It is unknown whether Liverpool have offered Hodgson a short-term contract given the public declaration from Tom Hicks and George Gillett, the club's deeply unpopular co-owners, to sell the club once their asking price is met.