Davis, who played for the Boston Celtics' 2007-08 NBA Championship team, was averaging 12.1 points and 6.3 rebounds over 45 games during an injury-riddled campaign 2013-14 with Orlando.
Davis, 28 -- obtained by the Magic in 2011 -- was under contract for $6.4 million this season and was set for $6.6 million next season.
"As we continue to chart what we believe is the best course of action for our organization, maximizing the development of our young players remains of critical importance," Magic General Manager Rob Hennigan said.
Over 417 career games with Boston and Orlando, Davis has averaged 8.9 points and 4.8 rebounds.
Orlando is in last place in the Southeast Division with a record of 16-40 -- third-worst in the NBA.