League sources told ESPN NFL Insider Adam Schefter on Wednesday that the Broncos were on the verge of cutting Bailey.
The Broncos save $10 million in cap space with the move.
"This was a difficult decision for our team with everything that Champ Bailey has meant to the Denver Broncos and this community over the last 10 years," said John Elway, the team's executive vice president of football operations/general manager. "Without question, he's among the best cornerbacks to ever play the game and one of the finest players in the history of the Broncos. You couldn't ask for more in a player than what Champ brought to this team. His combination of elite talent, class, leadership and competitiveness made him one of the all-time greats.
"On behalf of everyone with the Broncos, I wish Champ all the best and thank him for everything he did for this franchise. Champ will always be a Bronco. We look forward to his Ring of Fame and Pro Football Hall of Fame election in the years ahead."
Bailey, 36, was entering the final year of his deal after playing in a career-low five regular-season games this past season because of a Lisfranc foot injury. Some thought he should have been placed on injured reserve, but he played through it and returned for the playoffs, making his first Super Bowl appearance at Super Bowl XLVIII.
Despite his release, Bailey is not interested in retiring, according to a source close to the player.
Bailey played 10 seasons for the Broncos since the 2004 trade that brought him from the Redskins for running back Clinton Portis.
He was drafted by the Redskins with the seventh overall pick in 1999 and has 52 career interceptions, including a career-high 10 in 2006.
As the years have passed, quarterbacks started testing him more. That was evident in the playoff game against Baltimore after the 2012 season, when Bailey got beat twice for long touchdowns.
With that performance came inevitable whispers that maybe it was time for him to move to safety or even to the slot position.
After his foot injury, Bailey moved inside, and he played well.
Bailey came close to a Super Bowl with Denver during the 2005 season as well. He had one of his more memorable moments in a divisional-round playoff game that year, when he intercepted Tom Brady and returned the ball 100 yards down the sideline. He was chased down a yard short of a touchdown, but it was a game-changing play and the Broncos won. They had home-field advantage the next week, only to lose to Pittsburgh.
While Peyton Manning was the undisputed leader of the offense, Bailey held a similar role on defense. He took the younger cornerbacks under his wing, teaching them tricks and grooming them to possibly take over someday.
With free agency on the horizon, the Broncos have work to do in the defensive backfield. It could start with working out a deal with Dominique Rodgers-Cromartie, who's set to become a free agent after a solid first season with Denver.
Upon hearing the news of Bailey's imminent release, Broncos cornerback Chris Harris weighed in on his Twitter account.
Blessed to be able lineup opposite Champ and learn from a Great . Will def be missed . http://t.co/shShhj6PtX
- Chris Harris (@ChrisHarrisJr) March 6, 2014
Harris was joined on Twitter by Broncos defensive back David Bruton.
5 years with Champ! Can't believe 1 of the greatest is no longer here. Learned more than u can imagine from him. More than a teammate 4 sure
- David BRUTON JR. (@D_Brut30) March 6, 2014
The Associated Press contributed to this report.