The 31-year-old, who is not in the latest England squad for the Ashes series against Australia, will go off the Sussex payroll at the end of the season next month and be on loan to a second-tier team until then.
"Clearly this season has been a very difficult time for Monty Panesar," read a statement from Zac Toumazi, chief executive of Sussex Cricket, on Monday.
"Having reviewed the whole situation the club has agreed that Monty be released from his contract.
"This will give him every opportunity to put his personal and professional life back on track."
Panesar is indeed going through a rough time. On Sunday, there were reports that his marriage with pharmacist wife Gursharan Rattan finally ended after a bitter divorce battle.
In recent years, he was England's back-up Test spinner, but Lancashire left-armer Simon Kerrigan was picked alongside main spinner Graeme Swann in the squad for this week's fifth and final Ashes Test at the Oval starting on Wednesday.
England lead Australia 3-0.
Image: Monty Panesar
Photograph: Ryan Pierse/Getty Images
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