Sunderland-born Mustard, 33, made his limited-overs debut in 2000 and has won Championship and one-day titles, and captained the team in all formats.
But more recently he has been a one-day specialist and, following talks, he has failed to agree a new deal when his current one expires in September.
"Phil has been a fantastic servant," said chief executive, David Harker.
"He embodies competitive spirit, loyalty and skill and will be greatly missed by everyone at Durham".
Mustard, who made 10 one-day international appearances for England, is the first player to score 3,000 domestic T20 runs for one club.
He added: "I have achieved great success, winning the Championship three times, and the one-day competition twice.
"However, it is the right time for me to take up a new challenge in my career with a different club."
Wicketkeeper Phil Mustard is to leave Durham at the end of the season after 16 years with the county.