Diego told he can leave Wolfsburg
Diego joined from Juventus last year in a deal until 2014 but failed to live up to expectations with the 2009 champions who narrowly avoided relegation.
He angered club bosses when he walked out on the team after being dropped from the squad for the final league match of the season.
"After the discussion we had [on Friday], it was clear that working together would be a problem and that it would be better if we went our separate way," coach Felix Magath said on the club website.
Wolfsburg said the player will continue to train with the team but has been ordered to find a new club.
"I always felt well here but I did make a mistake," said Diego. "Now it is all about finding the best solution for the club and myself."