The former England international has reached an "amicable agreement" with the Championship club as managing director Derek Shaw prepares for the new Financial Fair Play rules
The 36-year-old nine-time England international, who has also featured for Charlton and Tottenham, joined the club on a two-year following their relegation from the Premier League and went on to make 35 appearances.
However, after featuring very little under new manager Gary Bowyer, the club's managing director, Derek Shaw, has admitted Murphy's contract was terminated for cost-cutting measures.
"Danny has had a wonderful career, but sadly he is not in Gary Bowyer's long-term plans," Shaw told BBC Radio Lancashire. "So, we sat down with Danny and reached a mutual agreement on a financial package to cancel his contract with the club.
"This move is in line with the club's plans to keep overheads down as much as possible, to allow us to be in line with the new fair play rules."
A statement on the club's official website read: "The club would like to place on record its thanks to Danny for his efforts and we wish him well for the future."