The 31-year-old signed on for a second spell with the Light Blues last summer, playing 30 games and scoring six goals, although only eight of his appearances were starts.
However, he fell down the pecking order following the loan arrival of Bournemouth striker Jermain Defoe and didn't feature in a matchday squad beyond April 7, when he was an unused sub in a 3-0 win at Motherwell.
His last appearance on the park came as a second-half substitute against former club Hearts, in early April.
The Northern Ireland international started his career at Burnley and had spells with Darlington, Rangers, Swiss side FC Sion, Palermo in Italy, Norwich, Turkish outfit Rizespor, Birmingham and Hearts.
A statement from the Ibrox side posted on the club's official website read: "Rangers can today confirm that Kyle Lafferty’s contract has been terminated by mutual consent.
"Kyle leaves with the best wishes of everyone at the club for his future career."