The 41-year-old has ridden 98 group one winners for Sheik Mohammed bin Rashid Al Maktoum's stable and over 800 winners in total with the outfit, including the famous day in 1996 when he won all seven races in a single meeting at Ascot on Godolphin horses.
Dettori had been principal jockey for the stables for 18 years.
The first rumours that he might split from his employers emerged when he accepted a ride on the Coolmore-owned Camelot in the Qatar Prix de l'Arc de Triomphe, and Godolphin have now confirmed that they will not retain Dettori next season as they felt the arrangement was "not really working".
"We have had a tremendous association with Frankie over many years. He has achieved so much on behalf of Godolphin and has made the difference between winning and losing on so many occasions in the world's biggest races," said Godolphin racing manager Simon Crisford.
"However, Frankie is looking for a fresh challenge and we felt that the retainer was not really working so this is the best way forward. We have had many great days together and we look forward to working with Frankie in the future and hopefully enjoying more success together.
"He remains a great friend - the difference next year will be that he will not be our retained jockey and will operate as a freelance instead."
Reports claimed that Dettori had become increasingly frustrated at sharing top billing with Mickael Barzalona, the 21-year-old French rider who has already won the Derby, the St Leger and the Dubai World Cup.