Jurgen Klopp admitted on Friday his struggling Liverpool squad need a rebuild, saying he signed a new contract last season to oversee the repair job at Anfield.

Liverpool's current campaign is in danger of unravelling after this week's chastening 5-2 Champions League defeat by Real Madrid in the first leg of their last-16 tie.

Last season, Liverpool came agonisingly close to winning an unprecedented quadruple but are now already out of both domestic club competitions and lag 19 points behind Premier League leaders Arsenal.

Klopp has been blamed for failing to refresh the squad, particularly his ageing midfield, but the German said "splashing the money" was not a solution at Anfield.

Instead the club appears to have taken a more strategic approach. Midfielders James Milner, Alex Oxlade-Chamberlain and Naby Keita, forward Roberto Firmino and third-choice goalkeeper Adrian are all out of contract in June, suggesting there could be significant transfer activity.

Last April, Klopp extended his contract until 2026, knowing major changes were necessary.

"We know we have to change things and we will," said the Reds boss, whose side are away to Crystal Palace on Saturday. "We cannot do that now but it is already clear we have to do something in the summer.

"The way this club is led is not by splashing the money and having a look to see if it works out or not. Our transfers always have to be on point.

"We cannot make four transfers before we know who will leave the club. I knew it would be tricky, that is one of the main reasons I signed a new contract."

Klopp said he understood the frustrations of some fans but was adamant that "last season was not a season for big change".

Liverpool were pipped to the Premier League title by Manchester City and lost the Champions League final to Real Madrid but ended up winning the FA Cup and the League Cup.

"We played until the last moment and if you want to change at this club you cannot just bring in new players and realise 'Oh, no one wants to leave'," said Klopp. "It doesn't work like that.

"It is not possible to start it (transfer planning) early because we had final after final after final, played the season until the last minute, played the Champions League final and then we had a short break, then we had a lot of injuries and the World Cup."

Despite their struggles, Liverpool are still only seven points adrift of fourth-placed Tottenham with two matches in hand and Klopp said not all was doom and gloom.

"I don't say everything everyone says around us is wrong, not at all, but most of the things are not right as well," said Klopp. "We know we have to improve.

"You can lose against Real Madrid but I don't think a lot of teams can cause them the problems we did in the first 20 minutes. That is a sign of quality."