“The decision to rescind the contract with Paletta was agreed by mutual consent,” Milan club director Massimiliano Mirabelli said on Twitter.
“I wish to salute a great man even more than a great player. An example of fairness, professionalism and sporting behaviour.
“All the best Gabriel, for everything that will come in your career.”
Fenerbahce are the favourites to sign the centre-back, who turns 32 in two weeks, and who joined Milan from Parma in 2015 on a three-year deal which was due to expire in June.
But Turkish clubs Galatasaray and Antalyaspor are also interested in the player who is also considering a move to China.
Paletta, capped three times by Italy, spent one year with Liverpool during the 2006-07 season and made just three Premier League appearances.
Meanwhile, AC Milan confirmed on Tuesday the loan of 19-year-old midfielder Niccolo Zanellato to Crotone with an option to buy with Brazilian goalkeeper Gabriel, 25, leaving on loan to Empoli.
Milan received a boost by beating Lazio 2-1 last weekend in Serie A and face Simone Inzaghi’s team again Wednesday in the Italian Cup.
Would you like to place a soccer bet? Click here to get started in 3 easy steps.