As exclusively revealed by Goal.com on Thursday, the 22-year-old has decided against renewing his current contract, which expires in the summer, after failing to reach an agreement with the Bundesliga outfit.
The former Alemannia Aachen star had been locked in negotiations with his employers for a number of months but, after teammate and Holland international Klaas-Jan Huntelaar agreed a new deal earlier in December, the club feel they can afford to let the Liverpool and Arsenal target leave.
The club's general manager, and former player, Horst Heldt, indicated that Schalke respect the German's personal decision but is confident that he can still play a vital role in the remainder of the team's season.
"We wished that Lewis [Holtby] saw his future at Schalke," he told their official website. "But like Klaas-Jan now he has made a personal decision that we respect.
He added, "We are sure that he will give [everything] up to the last day of the season to make the contribution of our team successful."
Liverpool boss Brendan Rodgers is interested in the midfielder and now looks set to secure the services of Holtby in the summer, however the Reds are sure to face competition for the boyhood Everton fan.
A whole host of Europe's top teams are said to be interested including Bundesliga leaders Bayern Munich, with Arsenal the other Premier League outfit reportedly linked with a move.