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Dawson scored more than 10,000 runs and took over 350 wickets across 200-plus appearances for Hampshire.
He also featured four times in Test matches for England against India and South Africa, with his most recent appearance coming last summer at Old Trafford.
Only Robin Smith, Jimmy Adams and James Vince have scored more runs than Dawson for the county.
He scored 54 half-centuries and 17 hundreds, with a career-best innings of 171 coming against Kent at Canterbury in 2022.
signed a new three-year contract at Hampshire in 2025, will return to Utilita Bowl for their first T20 match of the season on 22 May.
"Liam has been an outstanding servant to Hampshire Cricket," said Giles White, director of cricket.
"He leaves a huge hole in the team and will be hard to replace, especially for the remainder of this Championship season.
"He is the only Hampshire player of the modern era to represent the club in over 200 first-class appearances, which underlines just how rare an achievement that is at this level.
"We support Liam's decision and are delighted he remains fully committed to the white-ball game. We have no doubt he will continue to be a match-winner for Hampshire for years to come. He remains a hugely important part of our plans."

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