The Swede joined the Hammers on a three-year deal last summer earning wages of around £85,000 per week however he only made 25 appearances for the club after a string of injuries and poor performances.
It is believed as part of his pay-off Ljungberg will receive around two thirds of his expected salary for the remaining two years which equates to almost £6 million.
Hammers Chief Executive Scott Duxbury explained, "We respect Freddie Ljungberg's position and are pleased we could reach agreement and wish him all the best in the future. This deal is mutually acceptable to both parties."
Ljungberg himself seems happy to take the money and run. "I gave my all at West Ham and enjoyed my time there but the decision is the best for the both of us. Now I will take my time to consider my football future."