The 37-year-old has returned to his native Iceland and will become a player-coach at Reykjavik FC, where he began his career back in 1995.
Gunnarsson made 108 starts and 55 substitute appearances for the Royals, scoring 10 goals, picking up a pair of Championship titles, and famously setting up Shane Long for the winner in an FA Cup victory at Liverpool.
Gunnarsson said: "Reading Football Club have been a huge part of my life for many, many years now and will continue to have a place in my heart for as long as I live.
"I have an incredible amount of happy memories from my time there, too many to mention, but of course I would like to thank all the staff and players who I have had the pleasure to work with at Hogwood Park.
"I also want to thank the supporters for their superb backing, something which has really meant a lot to me and my family. Reading will always be the first result that I check for and I wish the club all the success in the world."
Reading boss Brian McDermott added: "Brynjar Gunnarsson has been an absolute hero for our club. In all the time he's been here, he has been nothing but a top man and a top player.
"He's got an opportunity to go coaching and playing in Iceland, and his family is out there. He came to me a few weeks ago and said that, if he did get the chance to go back, then he wanted to do that.
"It is sad because he's been a great servant for our club and it was a privilege to work with him. I wish him and his family all the very best."