The former England international, who has been plagued by injuries in recent years, joined Roberto Mancini's side last August after leaving city rivals United.
However, he played just four times and scored one goal in a League Cup victory over Birmingham.
"Owen Hargreaves leads the list of players released by Manchester City following the end of the 2011/12 season," the club said in a statement.
Hargreaves had surgery on both knees in 2008 and 2009 during his injury-hit spell at Manchester United. The 31-year-old's last outing came in the 3-2 FA Cup third-round defeat to United on January 8 when he played the final eight minutes.
City have also released Israeli midfielder Gai Assulin who signed for City in December 2010 but made no senior appearances and was on loan at Brighton towards the end of 2011/12, along with Ahmed Benali and fellow academy graduate Sean Tse.