Her decision came just seven months after she took the job and one month after the country’s quarter final exit in the Women’s World Cup.
“We have worked hard to keep her but we also understand and respect her decision,” the Chinese Football Association said in a statement.
China’s sports ministry last week ordered the country’s football association to make every effort to keep Domanski-Lyfors with under 300 days to go to the Olympics.
The order was delivered to the Chinese Football Association as it awaited an answer from Domanski-Lyfors on whether she planned to return from Sweden to extend her contract and continue coaching the side.
China’s first foreign coach, she was hired in March to stop a slide down the rankings by the national women’s team, which reached the 1999 World Cup final.
The Swede predicted that she would lead the team into the last four at the 2007 World Cup held in China last month.
The so-called Steel Roses began to bloom again under their Swedish mentor with a string of good results.
However, the side’s renaissance was stopped in its tracks when the team were eliminated in the quarter-final.
The setback forced the Swede to reconsider her position ahead of the Olympics, and personal problems related to her family are also reported to have played a part in her deliberations on whether to return to China.
Domanski-Lyfors previously coached the Swedish national team for nine years, leading them to the final of the World Cup in 2003 where they lost to Germany.