The 34-year-old had spent most of his career at the club, which said it was now giving him the chance to take his first steps as a coach.
"The club leadership has, after weighing things up with coach Thomas Schaaf and a careful judgment of the sporting and financial aspects, decided not to offer Torsten Frings a new contract as a professional player," the club's sports director Klaus Allofs told a news conference.
"Werder Bremen will offer him a post which allows him to develop as a coach and acquire the necessary licence."
Werder said the coaching offer would remain open even if Frings decided to continue his playing career at another club.
"We expect his reply in the next few days," the club said.
Speaking to local Bremen newspaper Kreiszeitung Syke, Frings said: "I have to accept it. It's a shame, I would like to have ended with a more successful season."
Frings had spent the past six years at Werder, returning to the club where he started his Bundesliga career before short spells at Borussia Dortmund and Bayern Munich.
"Torsten has been the life and soul of the team for many years and has given everything for Werder Bremen," coach Thomas Schaaf said.
He won 79 caps for Germany, scoring 10 goals, and played at the 2002 and 2006 World Cups and Euro 2008.
He was in the team which lost the 2002 World Cup Final to Brazil and the Euro 2008 final to Spain.
"We've weighed everything up carefully and had a lot of conversations with him," said Schaaf.
Werder finished a modest 13th in the 18-team table this season with 41 points, only five more than the relegation play-off spot.
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