In a statement issued after an emergency meeting late on Thursday night, the party's state president Don Harwin said its executive had unanimously decided to terminate Shields' employment over the fiasco.
"The state director was given the opportunity to explain the circumstances to the state executive," Mr Harwin said early on Friday.
"This failure to meet such a fundamental responsibility has rendered his position untenable.
"As a result, the state executive has unanimously resolved to terminate the state director's employment with immediate effect."
It leaves the party without a senior leader four weeks out from statewide elections where more than four million voters will have their say.
The party's failure to submit all nomination forms by midday on Wednesday has left eight local councils - including several in party heartland - without a Liberal candidate on the ticket.
Another eight have only partial coverage, such as in Penrith where one ward has only Labor candidates on the ballot.
Transport Minister Jo Haylen, a former Labor council mayor, said she could understand the anger and disappointment in communities and from candidates.
"People deserve a choice," she told reporters on Friday.
"The Liberal party has failed to deliver that opportunity for people across Sydney."
Mr Shields had resisted resignation calls from NSW Opposition Leader Mark Speakman and other senior leaders since Wednesday's nomination deadline.
Opposition leader Mark Speakman had said the state Liberal director's position was untenable. (Bianca De Marchi/AAP PHOTOS)
Ahead of the state executive meeting, a defiant Mr Shields labelled such calls "premature" and shifted blame to the party's de facto board led by Mr Harwin.
The powerbroker and former state minister had volunteered to run the local government nomination process, with the executive only picking the last candidate two hours before nominations closed, Mr Shields said.
"There must be a proper review of the nomination process to establish the full facts," he said.
According to Mr Shields, some 440 candidates were to be nominated, but electoral commission data shows only 281 made the cut.
One of those left off - former rugby league international-turned-councillor John Dorahy - started his campaign more than four weeks ago.
"A few of my colleagues (including some incumbent councillors) are just beside themselves ... the rug has been pulled from under them," the Wollongong mayoral hopeful told AAP.
"It's mind-boggling, to be honest."
Former rugby league international John Dorahy was among those left out in the cold. (Mick Tsikas/AAP PHOTOS)
The NSW opposition leader on Thursday led a chorus of senior Liberals who were scathing about the "monumental stuff-up".
"It's a basic matter of competence and administration," Mr Speakman told reporters, adding the state director's position was untenable.
Mr Speakman denied it was a sign the party had lost its way but expected ongoing ramifications.
Other Liberals have attacked the 26-member state executive, whose troubles also caused late selection of several candidates for the 2022 federal election.
Federal party leader Peter Dutton suggested there needed to be at least two resignations.
Northern Beaches, Lane Cove, Camden and Campbelltown councils are among those affected in Sydney, along with regional voters at Cessnock, Wollongong and the Blue Mountains.
14°C