Ancelotti made the decision public after last night's 0-0 draw with Real Betis - their last of the LaLiga season.
He said, "I mentioned to Isco before that he made his debut in my first game here at Madrid and scored a header.
"This is the end of a fantastic career at Real Madrid. Yes, he could have done more, but he's been an important part of this team in recent years.
"He's featured in important games and in finals. He's always competed well and proved his quality. I wish him all the best."
Need a VPN? Or seeking to switch? Then support Tribal Football by clicking here to sign up with our official partners NordVPN. Not only will you receive the best VPN experience, but also great discounts by signing up via Tribal Football. Thanks for your support!