England Sunday called up left-arm Simon Kerrigan for the Oval Test, dropping a big enough hint that Panesar's international career was in jeopardy.
Panesar, 31, was fined 90 pounds by the police for drunken disorderly bheaviour after urinating on night club bouncers and Sunday he received a big jolt when he was dropped for the Oval Test against Australia.
Sussex announced after investigating the matter that the left-arm spinner has played his last match for them.
A statement read: "Sussex County Cricket Club can confirm that Monty Panesar will be allowed to leave the club at the end of the 2013 season.
"The club's investigation into the recent incident, which took place on Monday August 5, has been concluded - and both parties have reached agreement.
"He will become a free agent as of Friday September 27, 2013."
It is thought likely Panesar will, however, spend the remainder of the season on loan with his former club Northamptonshire.
The statement added: "Additionally, Sussex has agreed to Monty's request that he be allowed to play on loan for a club in Division Two of the LVCounty Championship until the end of this season."
Sussex chief executive Zac Toumazi said: "Clearly this season has been a very difficult time for Monty Panesar.
"Having reviewed the whole situation, the club has agreed that Monty be released from his contract.
"This will give him every opportunity to put his personal and professional life back on track."
Sussex's professional cricket manager Mark Robinson added: "Monty has been an integral part of the professional cricket team and has been a valuable contributor to the overall performance of the club during his time at Sussex.
"He is an outstanding bowler. I would like to thank Monty for his contribution and wish him well for the future."
Pnesar, who still has two more years of contract to run, thanked the county for agreeing to release him so that he could explore other opportunities of playing in all forms of the game.
Panesar said: "I am grateful to Sussex for allowing me to be released from my contract for 2014 and 2015 in order to explore other opportunities to further develop my cricket. I want to give myself the best chance of playing all forms of the game at the highest level.
"I have endured a challenging time this year off the field and my frustrations have sometimes got the better of me professionally. I apologise for letting the club, my colleagues and my fans down.
"I have re-engaged with Neil Burns at London County Mentoring, to help to develop my cricket further and I feel that Neil, along with a trusted support structure in place around me will help me put my personal and professional problems behind me and enable me to put all my energies and focus into the game and a new club.
"I am determined to do whatever it takes to gain selection for England this winter. I want to become the best I can be.
"I believe that if I maintain the bowling progress I have made in recent weeks which enabled me to be selected for the Test squad at Old Trafford, I can fulfil my long-held ambition of becoming the best spin bowler in the world, over time."
The developments left 30-year-old pharmacist Gursharan sickened as she tried to start a new life, reports the Daily Mirror.