A serious ankle injury curtailed Lolley's fourth and final campaign with the Sky Blues, who only welcomed the 33-year-old back to the field for last month's semi-final defeat of Newcastle.
The former Nottingham Forest winger came on as a substitute in the second half of the 1-0 grand-final loss to Auckland FC on May 23, his last of 115 appearances for Sydney.
Lolley scored 36 goals for the Sky Blues and had been out of contract after the most recent ALM season.
"It's sad," Lolley said of his departure.
"I've spent the last four years of my life here and with these boys, it's never nice leaving but I move onto my next chapter and I'm looking forward to it."
Lolley was hopeful he would find an opportunity at an ALM rival for the 2026/27 season.
"Ideally I'd like to stay in Australia and play football," he said.
"I still feel like I can really contribute and barring a few injuries I feel like I'm ready to prove myself again and I'm up for whatever challenge comes my way."
Lolley's departure comes as Sydney continues a new chapter under Patrick Kisnorbo, who replaced Ufuk Talay as coach midway through the 2025/26 campaign.
One of Sydney's most beloved international players, Lolley was man of the match when Sydney defeated Brisbane Roar in the 2023 Australian Cup final.
He was Sydney's player of the year for 2024 and helped the club reach the ALM finals in three of his four seasons on the roster.
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