Sources told ESPN.com that the Nuggets decided Friday to waive the Greek swingman in advance of an early October deadline in his contract that would have locked in the 25-year-old's salary for the upcoming season.
Papanikolaou will become an unrestricted free agent next week if he clears waivers.
By waiving Papanikolaou before the deadline, Denver completely sheds his $4.8 million salary for 2015-16. The swingman never played a game for the Nuggets, moving to Denver in late July as part of the deal that sent Ty Lawson to the Houston Rockets.
In his rookie season in Houston, Papanikolaou played sparingly, but remains a well-regarded prospect after contributing to two Euroleague titles at Olympiakos in his native country before a stint with FC Barcelona in Spain.