"Over the last 18 months Brad has developed arguably into one of the leading batsmen in the world," said James Whitaker, the club's director of cricket.
"After offering Brad a two-year contract on terms which reflect his standing in the game, naturally we are disappointed that he is not returning in 2005.
"On behalf of all at Leicestershire County Cricket Club I would like to thank Brad for his enormous contribution over the last two seasons, on and off the field.
Hodge, whose form for Leicestershire has put him in contention for a place in Australia's Test squad, had already been ruled out of final Championship game of the season against Somerset this week because of a groin injury.
He has scored 1,548 runs at an average of 62 this season.