Urlacher told the Chicago Tribune that he originally sought a two-year deal worth $11.5 million with hopes that it would lead to negotiations.
But the Bears' only offer to the star linebacker was a one-year contract worth $2 million, sources told ESPN NFL Insider Adam Schefter.
"It wasn't even an offer; it was an ultimatum," Urlacher told the Tribune. "I feel like I'm a decent player still. It was insulting, somewhat of a slap in the face."
Urlacher countered with a one-year, $3.5 million offer with incentives that would have allowed him to make an additional $500,000, league sources told ESPN's Ed Werder. But Chicago never budged.
Although Bears general manager Phil Emery indicated Urlacher was ready to move on, the 13-year veteran would prefer to finish his career in Chicago, a source familiar with the situation told Schefter.
Urlacher told the Tribune there are no hard feelings left with the organization and that he doesn't plan to retire. He feels healthy and is determined to play at least one more NFL season, according to league sources.
"We were unable to reach an agreement with Brian and both sides have decided to move forward," Emery said in a statement.
"Brian has been an elite player in our league for over a decade. He showed great leadership and helped develop a winning culture over his time with the Bears. We appreciate all he has given our team, on and off the field. Brian will always be welcome as a member of the Bears."
Urlacher injured his knee during the 2011 season finale against Minnesota and underwent at least one procedure during last offseason.
He barely participated in training camp and spent part of the regular season trying to regain his Pro Bowl form.
Despite the challenge, Urlacher made 68 tackles in 12 games. But he suffered a hamstring injury chasing Seattle Seahawks quarterback Russell Wilson on Dec. 2 and missed the last four games of the regular season.
Urlacher maintained after the season that he still had football left in him, and he has posted photos on his Twitter account of him working out and looking forward to next season.
"I have no questions about (having more football left)," Urlacher told ESPN 1000's "Waddle & Silvy Show" in January. "At times (last season) I felt like I was playing pretty well. I was just so inconsistent. It was frustrating for me, too, as a player. ... I was never really in football shape. It was very frustrating for me to be out there and just not be able to do what I normally do.
"I think I can get back there, though, just through training in the offseason and practicing. Gosh, I missed so much practice last year. It was frustrating."
Many believe Urlacher is a lock for the Hall of Fame.
"Over the last 13 years Brian Urlacher has been an outstanding player, teammate, leader and face of our franchise," Bears chairman George McCaskey said in a statement.
"As Bears fans, we have been lucky to have such a humble superstar represent our city. He embodies the same characteristics displayed by the Bears all-time greats who played before him and he will eventually join many of them in the Pro Football Hall of Fame. We thank Brian for all he has given our team and our city. He will always be a part of the Bears family. We wish him the very best."
The Bears selected Urlacher with the ninth overall pick in the 2000 draft. Despite his size, Urlacher was a versatile defender at New Mexico, where he played safety and linebacker.
Urlacher originally was lined up at outside linebacker with the Bears, but after an injury to Barry Minter, he moved to the middle and enhanced the franchise's legacy of standout middle linebackers. Urlacher earned defensive rookie of the year honors and was voted as a Pro Bowl alternate.
He was an eight-time Pro Bowler and 2005 defensive player of the year.
The only Super Bowl he played in was a loss to the Indianapolis Colts in Super Bowl XLI.
Information from ESPN NFL Insider Adam Schefter and ESPN's Ed Werder was used in this report.