The Ghana midfielder made just 12 Serie A starts for the Rossoneri this season with his last appearance on March 7 and had another year left on his contract.
A statement from AC Milan read: “AC Milan and Sulley Muntari have reached a mutual agreement to terminate the contract that tied the player to the club.
“AC Milan would like to thank Muntari for his dedication and professionalism during his years at the club and wish him all the best for the future.”
Muntari joined AC Milan in the summer of 2012 from city rivals Inter and is expected to return to the Premier League this summer.
Everton are among the clubs keen to sign Muntari, who can now join as a free agent.
The 30-year-old played for Portsmouth in 2007-08 and spent six months on loan at Sunderland in 2011.