Celtic struggled in the 1977–78 season and Stein was persuaded to stand down. He was allowed to nominate his successor, Billy McNeill, and Stein thought an agreement was in place for him to join the Celtic board of directors. Celtic instead offered a management position in their pools company, which Stein rejected as he believed he still had something to offer football. A testimonial match for Stein was played against Liverpool at Celtic Park on 14 August 1978. After the game, the Liverpool manager Bob Paisley encouraged Stein, who was three years younger than Paisley, to stay in football. There was also the example of Bill Shankly, who had experienced an unhappy retirement since leaving Liverpool in 1974.
In August 1978, Stein was appointed manager of Leeds United. The players at Leeds received the news well, but were concerned that Stein had never shown any previous interest in managing in England. Early results were mixed, although the Leeds chairman Manny Cussins detected some improvement from the previous few seasons, when Leeds had slipped from their dominant position in English football. Attendances at Elland Road were low and Stein apparently missed the pressure of big games against foreign opposition.
Stein was appointed Scotland manager on a full-time basis on 5 October 1978, which was his 56th birthday. 65,872 attended his first game in charge, a 3–2 win against Norway at Hampden, despite the bus services in Glasgow being on strike. Stein had picked a team with only players based in England, but he felt that he could bring through more home-based players. He also believed that Scotland had tended to play with too much emotion and naivety, which he wanted to replace with an emphasis on retaining possession of the football. Two defeats to Belgium meant that Scotland failed to qualify for the 1980 European Championship. This was followed by losses to Northern Ireland and England in the 1980 British Home Championship, which led to some criticism in the media.