The 33-year-old Butler, from Racine, Wis., made 13 starts and appeared in 34 games this season, averaging 11.0 points, 4.6 rebounds and 1.6 assists.
"It's been a dream come true to wear the Milwaukee uniform, which so many of my idols growing up wore," Butler said in a statement released by the team.
The former Connecticut star has averaged 15.3 points, 5.4 rebounds and 2.5 assists in 764 regular-season games in 12 NBA seasons with Miami, the Los Angeles Lakers, Washington, Dallas, the Los Angeles Clippers and Milwaukee.
"When you talk about being a professional and handling yourself with class, that's what Caron has done here in Milwaukee," Bucks general manager John Hammond said. "We thank him for his many positive contributions both on and off the court and wish him and his family well."
The Bucks were at Indiana on Thursday night.