Jackson, who at age 34 entered training camp as the NFL's oldest running back, led the Bills in rushing last season. He was a team captain, a fan favorite and the franchise's third-leading rusher behind Thurman Thomas and O.J. Simpson.
"Today, we had to make the difficult decision to release Fred Jackson," Bills general manager Doug Whaley said in a statement. "He had an incredible career for this organization for the past 10 years.
"We thank Fred for his hard work, dedication and leadership during his tenure with the Buffalo Bills. Fred has inspired the city of Buffalo in a number of ways. Fred and his family have been dedicated to this community, and we can't thank them enough for their contributions through his career."
Whaley did not reveal in a news conference later Monday why Jackson was released, but Jackson offered a farewell to Bills fans via Twitter.
Thank you Buffalo!! We have loved being part of this community. The fan support has been overwhelming. The Old Man isn't done yet!!— Fred Jackson (@Fred22Jackson) August 31, 2015
"We thought for us and at this time, we had to make this decision," Whaley said. "There are a lot of circumstances that go into that, but we will keep that in-house for competitive reasons.
"We also let everybody know that everybody was on board. Reluctantly, because of the magnitude of this player and what he means, not only to the Buffalo Bills, but to the community of Buffalo -- him and his family. So we talked to [owners] Terry [Pegula] and Kim [Pegula] and conversed with them and decided that this was the best time to make that decision."
Whaley called Jackson the "heart and soul of the Buffalo Bills" and said he and coach Rex Ryan had a "very emotional" conversation with the team's second-longest-tenured current player.
The Bills will save about $2.5 million off their 2015 salary cap by releasing Jackson. NFL Players Association records listed the Bills with $6.6 million in cap space Monday morning.
"These decisions, everything ... it comes into play," Whaley said Monday. "I always say information makes the decision. So we combined all the information and thought it is a hard decision, but a decision we had to make."
Jackson missed two weeks of training camp with a hamstring injury, but he returned to practice last week and started in the Bills' preseason victory Saturday over the Pittsburgh Steelers. Jackson ran for a 41-yard gain on his first carry and then scored on a 1-yard touchdown.
"I'm not gonna say that we're a better team because Fred Jackson is not here," Ryan said. "I certainly don't believe that. But it's part of the process. It's what happens.
"You can't -- a lot of times you're restricted by your limitations, or several limitations that you have as a team. Sometimes you can't keep everybody you want to keep."
The Bills' decision to part ways with Jackson comes nearly six months after The Buffalo News reported that top team executives debated releasing him before the start of free agency in March. The Bills had expressed interest in signing New York Jets running back Bilal Powell, who was a free agent at the time, a source told ESPN's Dan Graziano.
Jackson's release leaves the Bills with an unsettled backfield as they prepare for their regular-season opener Sept. 13 against the Indianapolis Colts.
LeSean McCoy (hamstring) remained out of practice Thursday. Bryce Brown (hamstring) and Boobie Dixon (calf) returned to practice Thursday but did not play in Saturday's preseason game. Rookie running back Karlos Williams also remained out of practice last week following an undisclosed medical procedure.
Jackson had expressed interest earlier this offseason in playing several more seasons in the NFL.
"That was part of the decision," Whaley said. "To give him the respect to be able to shop his wares to other teams and be able to get in before that final cut, and maybe assimilate to what they want him to do and ask him to do."
Bills safety Aaron Williams, a close friend of Jackson since being drafted in 2011, wore Jackson's No. 22 jersey to practice Monday afternoon.
Jackson was the Bills' leading rusher last season. In 14 games, including nine starts, he gained 525 yards on 141 carries and scored two touchdowns. He also led the team with 66 catches.
In 1,279 career rushing attempts for the Bills, Jackson gained 5,646 yards and scored 30 touchdowns.