The midfielder, 22, has had his contract cancelled by mutual consent because he has failed to gain a place in the first team squad.
He joined the foxes in August 2005 from Hearts and was signed by former manager Craig Levein. The Scot signed him in the hope that he would be "One for the future" but now Hamill's future no longer lies with City.
Hamill made 12 appearances for the foxes, scoring one goal in the Carling Cup match against Bury.