The Swiss, who has led the part-timers since 2006 and is their longest-serving coach, has been in charge for 45 matches, winning five, drawing six and losing 34 with 21 goals for and 112 against.
The wins were against Latvia, Iceland, San Marino, Lithuania and Andorra.
Zaugg will be replaced by Austrian Rene Pauritsch who becomes their seventh coach since they started playing international football regularly in 1993. The LFV said the change was part of "restructuring."
Despite having a population of only 35,000, Liechtenstein have often made life difficult for more glamorous opponents, losing 2-0 at home to Spain in early in Zaugg's reign and 1-0 at home to Russia.
In an interview with Reuters earlier this month, Zaugg said he had recently lost the services of several key players due to their work commitments.
He also said that Liechtenstein needed professional players to make further progress and said he wanted his side to play against more teams of the same standard, but that it was difficult to arrange friendlies.
Liechtenstein, 155th in the FIFA rankings, took four points from eight games in the Euro 2012 qualifying competition and two points from 10 games in the 2010 World Cup qualifiers.
They have lost their first four matches in the current World Cup qualifying campaign, including 8-1 at home to Bosnia