The 18-year-old goalkeeper is regarded as the heir apparent to Gianluigi Buffon with the Italy national side having produced a string of impressive performances in his fledgling career.
Donnarumma has been linked with the likes of Real Madrid, Juventus and Manchester United and has just one year remaining on his contract at San Siro.
And his departure now appears inevitable after Milan revealed he will not be putting pen to paper on an extension.
In a media conference, Milan CEO Marco Fassone said: "[Donnarumma's agent] Mino Raiola informed us that Donnarumma has made a definitive decision not to renew the contract with Milan.
"We had made a strong proposal. The player evaluated it and made some evaluations that were not just economic, but he told us that he does not wish to renew the contract and his time with Milan will therefore conclude by June 30, 2018.
"We were taken by surprise, as we had hoped Donnarumma would be the goalkeeper taking Milan into the future.
"Naturally, the decision leaves a bitter taste in the mouth, but now we have to go forward."