The SPL club confirmed last night talks over a new deal had broken down with the 44-year-old Portuguese.

A Hearts statement read: "Heart of Midlothian FC announces that it has started the search for a new manager after Paulo Sergio did not agree to the terms proposed to him by the club.

"Hearts has now commenced the process of putting a new coaching team in place which is capable of building on the success of the William Hill Scottish Cup victory over Hibs."

Sergio took up the reins at Tynecastle in August and last month led the team to Scottish Cup glory, beating Edinburgh rivals Hibs 5-1 at Hampden.

First-team coach Gary Locke will stay at the club and be part of the new coaching set-up.

Sergio expressed his sadness at departing the club, and admitted he had no idea what his next career move would be.

He said: "I deeply regret I will not continue my work at Hearts.

"I appreciate the road the club is now going down and respect what our board is doing. But I cannot accept the offer the club has made me.

"I want to say many thanks to everybody who worked with us, including our board, and special thanks to our supporters.

"I wish the very best to this great football club and I am now just one more Hearts supporter.

"I would also like to say thank you to all the players, who will be friends for life.

"And as for my future? Only God knows."

Hearts assured fans they had done everything possible to keep Sergio.