WALTER SMITH returned as manager of Rangers today for the second time.

At Murray Park, chairman Sir David Murray unveiled his new management team of Smith, assistant manager Ally McCoist and first team coach Kenny McDowall.

At the same time, at Hampden, the SFA revealed they were taking legal action against Smith "for breach of contract" and against Rangers "for inducement to breach the contract".

But nothing could dilute the joy of the man who completed nine-in-a-row for Rangers before being replaced by Dick Advocaat eight-and-a-half years ago.

Smith said: "Rangers has always been in my blood. I can't wait to get started."

Smith had a one-hour meeting at Hampden this morning with SFA chief executive David Taylor. This followed talks on Monday and yesterday with Taylor and the three office-bearers - president John McBeth and vice-presidents George Peat and Campbell Ogilvie.

The outcome last night was an offer of compensation to the SFA from Rangers to release the Scotland manager from the remaining 18 months of his contract.

Smith had hoped to be told at Hampden this morning he was free to join Rangers. Instead, Taylor informed him that Rangers' offer had been rejected, and Smith immediately tendered his resignation.

The man who resurrected Scotland's pride and their European pedigree then immediately left, tight-lipped, and headed to Murray Park.

A statement from the SFA said: "At a meeting this morning with the chief executive, Walter Smith delivered a letter of resignation with immediate effect.

"No agreement has been reached with Mr Smith or Rangers on any compensation for the early termination of his employment, which is in breach of his contract.

"In the absence of agreement, proceedings will require to be raised against Mr Smith for breach of contract and Rangers for inducement to breach the contract."

Taylor added: "Walter's departure is a serious blow to the SFA. He has done an excellent job. We are very disappointed he has chosen to leave us at this critical time in our Euro 2008 campaign."

Neither the SFA nor Rangers will want this wrangle to drag on, and they will hammer out a compensation agreement, with the SFA thought to want around £450,000.

Before Smith arrived at Murray Park today, McCoist and McDowall took the training, watched on the sidelines by Murray and Ian Durrant, who was in charge for the Scottish Cup loss at Dunfermline.

Smith, who has transformed Scotland and managed Everton since leaving Ibrox in 1998, has signed a three-year contract.

He said: "I am delighted to return to Rangers as manager. This club has always been in my blood and I can't wait to get started.

"I am looking forward to teaming up with Ally and Kenny. I worked side by side with Ally during our time with the national team and I am also delighted Kenny has agreed to join us at Ibrox."

The trio will now be in the Ibrox dugout on Saturday for the SPL game with Dundee United. He should then have ample time to strengthen the squad before the transfer window closes at the end of the month.

McCoist gained final clearance from his various TV contracts yesterday. He then met Murray in Edinburgh and agreed a deal until 2009.

He said: "It was a privilege to pull on the Rangers jersey for so many years but I am delighted to return as assistant manager.

"I was honoured to be named in the greatest ever Rangers team and included in the club's Hall of Fame, but this is special. I know the club inside out. I am ready for the challenge."

McDowall didn't have a contract at Celtic, where he worked as reserve team coach, so left his duties at Parkhead immediately.

He said: "I'm an ambitious guy and I would have wanted to speak to Walter about this role regardless of my contractual situation at Celtic."

The former St Mirren and Partick Thistle striker added: "This is an exciting new chapter in my life and I am relishing the chance to team up with Walter and Ally at Rangers.

"Working at Murray Park on a daily basis will be a real thrill."

Deposed skipper Barry Ferguson also met Murray before his meeting with McCoist.

It is believed the 28-year-old held clear the air talks with his chairman after the fall-out that played a part in Paul Le Guen's departure last week and lost him the captaincy.