Pizarro, 38, has been at Bremen since arriving from Bayern Munich in 2015, but the mutual separation brings an end to his third spell at the club, who he first joined from Alianza Lima in 1999.
An 85-time Peru international, Pizarro has scored 191 goals in 430 Bundesliga games making him the highest foreign-born scorer in the league's history.
"It was always a huge honour to wear the Bremen shirt," said Pizarro, who intends to continue playing. "The club, the city and the fans will always have a special place in my heart. I would have happily played another year for Werder, but I accept the club's decision."
"We came to a mutual decision during discussions with Claudio," said Bremen sporting director Frank Baumann. "There were several factors that influenced our decision, but due to the competition for places in attack and the emergence of several young talents, whose development we don't want to hinder, we took the decision not to extend Claudio's contract. Claudio is a legend and will get the best possible goodbye: his own farewell game at the end of his career."
Of his 191 Bundesliga goals, the Peruvian scored 104 in three spells at Bremen (1999-2001; 2008-2012; 2015-2017), making him the club's all-time leading scorer.
Watch: check out Pizarro's moment of magic for Bremen against Schalke in 2001