Neagle, 36, who hasn't pitched since July of 2003, had one year remaining on a five-year, $51-million contract US.
In addition to the solicitation charge, he pleaded guilty to driving while impaired last year after his car hit another vehicle.
"This decision is about an organization and the fans that support it," Rockies chairman and chief executive officer Charles K. Monfort said. "Denny's pattern of behavior has not been consistent with what our organization represents."
Neagle was arrested last Friday for allegedly paying a woman $40 US for oral sex.
He was pulled over by police for speeding on a Denver street, at which time an officer apparently noticed the left-hander's eyes were watery and bloodshot plus detected an odour of alcohol.
Supposedly, the officer also noticed Neagle's pants were undone and, when queried about it, Neagle reportedly told the officer that he was "just getting comfortable."
But a woman inside the car told police she had performed oral sex on Neagle for a fee of $40 US.
Neagle allegedly admitted he was in the area looking for sex and was ticketed for solicitation of prostitution by police.
Neagle received a summons to appear in court on Jan. 27, 2005.
He is a 124-92 with a 4.24 earned-run average in 392 appearances over 13 MLB seasons with Minnesota, Pittsburgh, Atlanta, Cincinnati, the New York Yankees and Colorado.
Neagle spent last season on the disabled list after undergoing elbow ligament and shoulder surgery.