The Blues captain has only made 10 appearances in all competitions in 2016-17 and has not featured in the Premier League since the 5-0 win over Everton on November 5.
Terry said he had not made a decision on his future away from the club, but feels "it's the right time" for him to end his trophy-laden Chelsea career.
In a statement released via Chelsea's official website, the former England captain said: "There is so much to say and so many people to thank at this great football club."
"From coaches, team-mates and staff to the fans who have given me so much support down the years, I can't thank you enough. There will be opportunities for me to speak further about this over the coming weeks.
"I will decide on my future in due course, but for now I am committed to helping the team achieve success this season.
"The club and I have always had a fantastic relationship, which will continue beyond my playing days. We had some really positive talks but with everything taken into careful consideration I have decided it's the right time for me to leave.
"I've always been conscious that I depart at the right time, in the right way, and I feel that the end of this season is the right time for the club and I.
"I feel I still have plenty to offer on the pitch but understand that opportunities here at Chelsea will be limited for me. I'm eager to carry on playing and so will be looking to continue with a new challenge. I will of course always be a Blue and am desperate to end my final season as a Chelsea player with more silverware.
"Finally, words cannot describe the love I have for our football club and our amazing Chelsea fans. I would like to thank each and every one of you from the bottom of my heart for the unbelievable support you've shown me over the years. You mean the world to me and every trophy we've won during my time at the club we've won together. I will never forget the incredible journey we've been on."
Although a managerial career appears to be beckoning, Terry does not feel ready to hang up his boots.
The next move will be decided "in due course," Terry said, with lucrative moves to China, the United Arab Emirates and United States obvious potential destinations.
Chelsea director Marina Granovskaia made it clear that they hope for Terry to return in a new capacity in future.
"Everyone at Chelsea would like to place on record our thanks to John for all he has done for this football club. He has been an outstanding player, inspirational captain and has always demonstrated an exceptional commitment to the cause," she said.
"In that time, Chelsea has grown into one of the world's top clubs and it is only right that John's contribution is recognised. He will always be held in the highest regard by everybody at Stamford Bridge and we look forward to welcoming him back in the future."
Terry has won 14 major trophies during his Chelsea career, including five FA Cups, four Premier League titles and the UEFA Champions League in 2012.
He has made 713 appearances for the club since his debut in 1998, 578 of which came as captain, and scored 66 goals.