Angry Leeds said they had been forced to agree to pay two million pounds to Kewell's representatives or face the prospect of losing the coveted international for nothing when his contract expired next year under the Bosman ruling.
That meant they in effect received only three million pounds for the 24-year-old, one of the most sought after players in the world game.
Leeds chairman John McKenzie described it as a "paltry sum" and told his club's official website he was "angry and frustrated at the outrageous situation".
Kewell has already had a medical and agreed a five-year deal with Liverpool. He will be paraded by the Anfield club at a news conference scheduled for midday on Thursday.
Speaking on Sky Sports television on Wednesday, Kewell said the row over his fee had "taken the shine" off the move to Liverpool but added: "They're a great club and I believe that they're on the way up.
"It's a great team to play for. I've always been a childhood fan of Liverpool. I'm really looking forward to it."
The size of the transfer fee is another hammer blow to Leeds, whose debts stood at 78.9 million pounds when they reported their half-year financial results on March 31.
Kewell is the latest in a string of highly-rated players to leave the Yorkshire club, who narrowly avoided relegation from the premier league last season.
The exodus started with the sale a year ago of defender Rio Ferdinand to Manchester United. Three other England players -- striker Robbie Fowler, midfielder Lee Bowyer and defender Jonathan Woodgate -- have all subsequently left.
Manager Terry Venables was sacked in March by then-chairman Peter Ridsdale, who resigned soon after.
In a statement to the London Stock Exchange on Wednesday, Leeds said they had "no option" but to accept the terms of the deal because Kewell only had a year left on his contract and would have been a free agent at the end of next season.
McKenzie then issued a further statement in which he said: "The reality is that on Friday 4 July I agreed a deal of seven million pounds with Liverpool Football Club, which Kewell and his agent refused to countenance.
"Instead, they made a condition of not 'doing a Bosman' that we pay two million pounds to Kewell's representatives, and Liverpool then reduced the fee to five million pounds.
"What happened to the remaining two million, I believe I know, but only Liverpool or Harry Kewell could tell you.
"The (Leeds United) PLC was therefore faced with the alternative of taking the net three million (plus 2.5 million pounds in wages) to enable (manager) Peter Reid to strengthen the squad or getting next to nothing.
"So, sadly, the PLC felt it had no alternative but to accept the paltry sum."
Kewell's agent Bernie Mandic was later asked where the two million pounds -- the difference between the seven million pounds fee Leeds originally agreed with Liverpool and the five million pounds Liverpool eventually paid -- had ended up.
Mandic told Sky Sports television: "It is money that Liverpool have and will pay to Harry Kewell."
Kewell, who can play in midfield or up front, supported Liverpool as a boy in Australia and will wear the number seven shirt at Anfield, the shirt worn by players like Kenny Dalglish and Kevin Keegan in the past.
Liverpool manager Gerard Houllier said: "This is a fantastic signing for the club and its fans.
"It's a huge boost for us ahead of the new campaign and an indication of Harry's belief in what we want to achieve here."