The 32-year-old Australian has enjoyed terrific success with the bat in 2007 - scoring 1284 runs at an average of over 75.
But the prospect of playing 12 months of the year again in 2008 has caused Katich to rethink his future before coming to this decision.
Katich said: "I have thought long and hard about this decision and it has been a difficult one for me to make."
"I have never played two back-to-back full seasons of county cricket and being captain of both sides would make it very difficult because you can't keep going at 100 per cent the whole time."
Derbyshire head of cricket John Morris said: "I'm obviously disappointed that Simon feels unable to come back next year due to the fact that he still has ambitions to play for Australia. As I have said before, I would have loved the opportunity to work with Simon next year as I know how good a player he is."
"He has never returned to England for a back-to-back second term with any of the other counties that he has represented in the past."
"Simon feels that if he is to achieve his ambition to play for Australia in one-dayers again, he needs to commit his future to New South Wales."
"We at Derbyshire county cricket club have made a financial offer to Simon that I am sure was very attractive, but I have to respect that his decision is not financial but is purely to do with his own ambitions as an Australian player."
Chairman Don Amott added: "I would like to thank Simon for everything he has done for us this season in what, at times, have been difficult circumstances.
"Simon helped the club out immensely by taking charge of cricket matters after the mid-season departure of David Houghton and we thank him especially for that."
"I am sure I speak for everybody connected with the club when I say that we wish him every success for the future."
"There will always be a very warm welcome for Simon should he ever find himself back at the county ground in years to come."
County Cricket Championships