Afghanistan-born Nadim scored eight goals in 28 appearances across all competitions for the Women's Super League club but has struggled to settle in Manchester since her January move.
"Manchester City can confirm the termination of Nadia Nadim's contract," City said in a short statement.
Nadim, 30, had reportedly asked for a transfer in July, telling the BBC that she did not feel at home in England.
"I've never felt home either in Manchester or City. I have made it clear to the management that I want out, and this is something I've felt for a long time," Nadim was quoted as saying by the BBC.
"It is a fantastic club in many ways, but not for me."
Nadim, who fled war-torn Afghanistan as a 12-year-old, took refuge in Denmark before starting to play soccer.
Her talent was rewarded with a call-up to the national squad and she made her debut in 2009. She was part of the team that reached the Women's European championships final last year.
The Netherlands beat Denmark 4-2 for the title.
Nadim, who played for Portland Thorns in the United States before moving to City, will be a free agent on Jan. 1. (Reporting by Shrivathsa Sridhar in Bengaluru; Editing by Martyn Herman)
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