The 31-year old forward has been back at Fir Park since February 2013 but will exit the club when his current deal expires on May 31.
McFadden, who scored five goals for the 'Well this season, will now move on after coming to an agreement with the Lanarkshire outfit.
"I had James in last Friday and we had a discussion about the future and everything was very amicable," manager Stuart McCall told the club's official website.
"I cannot speak highly enough of his attitude, desire and professionalism whilst he was here, particularly when going through a difficult patch or when he was injured.
"In the past, we could possibly have used James in a number of positions, but I think he is at his best when played through the middle as a striker.
"We have five different options in that position and need to utilise the budget in other areas of the squad."
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