Daniels' agent, Glenn Schwartzman, told The Associated Press in an e-mail on Monday that the Pacers have indicated that they will not pay the final year of the deal. Daniels would have made $7.3 million next season, but now he's an unrestricted free agent.
Daniels averaged a career-high 13.6 points per game last season, but Brandon Rush emerged late and is the favorite to start at shooting guard next season.
Daniels has been successful during his three years as a Pacer, but he missed 73 games the past three seasons with an assortment of injuries.
A Pacers spokesman says the team cannot comment on the situation until free agency officially begins Wednesday.