The 30-year-old made 19 appearances for the club, scoring one goal and providing three assists but grew disillusioned after Julen Lopetegui was sacked in October.
Isco still had a contract that was supposed to run until the summer of 2024.
It has been rumoured that Isco could follow Lopetegui, who also managed him at Real Madrid, to Wolverhampton Wanderers.
The club said in a statement: "Sevilla FC and Isco Alarcon have agreed to terminate the contract that united both parties since the player from Malaga joined the Nervionense club last summer after finishing his spell at Real Madrid...The club wants to wish Isco all the luck in the world in his new professional challenges."
His move to Sevilla was supposed to revive his career.
Isco spent nine years with Real Madrid, whom he joined from Malaga in the summer of 2013 and won among other honours five UEFA Champions League trophies, three La Liga titles, one Copa del Rey and three UEFA Super Cups.
The Valencia youth product made 353 appearances in total for Los Blancos, scoring 53 goals and laying on another 56 assists for his teammates.
He fell out of favour under Carlo Ancelotti last season, only making 14 La Liga appearances.
