Pagano did not go into details other than saying, "It's unfortunate and [a] violation of team rules. It was an in-house deal, that's all I'm going to say about that."
It was just two days ago that Pagano spoke highly of Rainey because of his ability to also return kicks.
"He's going to help us in the return game and that's going to give him a chance to make this team," Pagano said over the weekend.
Rainey had little wiggle room to make any mistakes with the Colts because of a prior off-the-field issue.
He was arrested in Gainesville, Florida, and charged with one count of simple battery after an altercation with a woman over a cellphone in January 2013. The Pittsburgh Steelers, who he was playing for at the time, released him after his arrest.
The Colts signed Rainey in November 2013 and he played in two games for them before being placed on injured reserve with a foot injury on Dec. 9, 2013.
The release of Rainey leaves the Colts even thinner at running back because Vick Ballard is out for the season with a torn ACL and Trent Richardson has not been practicing because of a hamstring problem. Ahmad Bradshaw, Dan Herron and Zurlon Tipton are the only healthy running backs in training camp.