The
68-year-old had been in charge for four years after replacing Italian Fabio
Capello but has won just three of 11 games in major tournament finals.
Iceland
- with a population of just 330,000 - were among the lowest-ranked teams in
France at 34 in the world.
"I'm
sorry it will have to end this way but these things happen," Hodgson said.
"I
hope you will still be able to see an England team in a final of a major
tournament soon.
"Now
is the time for someone else to oversee the progress of a hungry and extremely
talented group of players. They have done fantastically, and done everything
asked of them."
Hodgson,
who won 33 of his 56 games in charge, would have been out of contract at the
end of the tournament and was set to have talks over having it renewed.
FA
chairman Greg Dyke had stated he would only stay on if England "do
well" in France, indicating that meant at least reaching the
quarter-finals - but they needed to beat Iceland to do that.
In
a statement issued following Hodgson's resignation, the FA said: "Like the
nation, we are disappointed to lose this evening and that our run in Euro 2016
has come to a premature end.
"We
had high hopes of progressing through to the latter stages of the competition
and accept that we have not met our own expectations or those of the country.
"We
back Roy Hodgson's decision to step down as England manager and will discuss
next steps imminently."
England
qualified for Euro 2016 with a 100% record in their group. They started the
finals with a 1-1 draw against Russia before beating Wales 2-1 and drawing 0-0
with Slovakia in their final Group B game - results that left them in second
place and in a tougher half of the draw.
Hodgson
faced heavy criticism following the Slovakia game for making six changes to the
side that had beaten Wales.
Under
Hodgson's guidance, England had reached the quarter-finals of the last European
Championship, losing to Italy on penalties, before a dismal showing at the 2014
World Cup where they went out at the group stages without winning a game.
Speaking
to reporters following Monday's last-16 defeat in Nice, Hodgson confirmed his
assistants Ray Lewington and Gary Neville would also be leaving their posts.
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