Ilicic is now free to find a new club after serving Atalanta fans with some magical displays for five years.
The 34-year-old joined Atalanta from Fiorentina in the summer of 2017 and went on to make 173 appearances for the club, scoring 60 goals.
Ilicic famously scored four goals against Valencia in the 2019/2020 Champions League round of 16 second leg to help Atalanta qualify for the quarterfinals, becoming the first player to score four goals in an away knockout tie in the competition's history.
A combination of injuries and mental health problems limited Ilicic's involvement with Atalanta for the second half of last season as he made 24 appearances across all competitions and scored four goals.
A statement on Atalanta's official website said: "Atalanta announce that the contract between the club and the player Josip Ilicic has been terminated by mutual agreement.
"He has enchanted Bergamo with his plays, his inventions and his pure class since 2017. He made us dream with his magic on the pitch and moved us with his sensitivity and humanity off it.
"His four goals at Valencia will forever remain a portrait of the champion Ilicic, while the noble gesture of donating the ball of that magical evening to Bergamo's Papa Giovanni XXIII Hospital is a portrait of the man Josip.
"There would be goals and assists to list, but what these five seasons together have meant goes far beyond numbers.
"Now we part ways, but the memories and emotions will remain forever. Good luck, Professor and thanks for everything!"
