"It's a mutual decision, I've had 10 unforgettable years here," he told reporters.
The playmaker has been heavily linked in Italian media reports with a move to fallen giants Juventus. He nearly joined Chelsea two years ago.
Pirlo has suffered a string of injuries and was not a regular under Massimiliano Allegri this season having lost his much of his former sparkle.
Milan, who won their first scudetto since 2004 this month and face Udinese in their final game of the campaign on Sunday, said in statements that striker Filippo Inzaghi and defender Alessandro Nesta had signed new one-year deals.
Inzaghi, 37, missed most of the season due to a knee ligament injury.
The club earlier announced that midfielder Mark van Bommel and reserve goalkeeper Flavio Roma had penned new contracts until June 2012 while Brazil defender Thiago Silva is now tied to the club until 2016.
The Rossoneri are yet to announce the futures of veteran midfielders Clarence Seedorf and Massimo Ambrosini as they consider rejuvenating their squad for a major assault on the Champions League next season.
Dutchman Seedorf is wanted by clubs in Brazil.
Milan are in the process of signing AS Roma centre-half Philippe Mexes and Olympique Marseille left-back Taye Taiwo on free transfers.
