The Daily Star Sunday says Benitez has already held talks with Dalglish and invited him to be a central part of his backroom staff.
American owners George Gillett and Tom Hicks back the appointment which will give the club a huge boost as they chase down that elusive title.
Scot Dalglish will be heavily involved with the first team but not in a coaching capacity.
Benitez will able to turn to him for advice and to pick his brains.
And the man who wore the No.7 shirt with such class will also play a part in the club's youth policy.
Liverpool have so far declined to comment officially because talks are still at an early stage.
But sources close to Dalglish confirm he is thrilled to have been approached and can't wait to get started.
However, Newcastle boss Alan Shearer will be devastated by King Kenny's Kop return.
Temporary Toon boss Shearer had sounded out Dalglish about a return as the club's director of football - 11 years after the club sacked him.