Algeria president Abdelaziz Bouteflika pleaded with Halilhodzic to stay, but he cited “family obligation and the lure of new personal challenges” as reasons behind his decision.
He is expected to be named new coach of Turkish outfit Trabzonspor next week.
The former Cote d’Ivoire manager became the ‘Le Fennec’s’ boss in July 2011 on a three-year contract.
Algeria lost their opening 2014 World Cup game 2-1 to Belgium, before defeating South Korea 4-2, while a 1-1 draw against Russia ensured they make the much-celebrated second round appearance.
The squad were given a hero’s welcome in Algiers on Wednesday on arrival from Brazil.
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