The 34-year-old former Manchester United player joined from Fulham in January 2014 and last season he scored the second goal in a memorable 3-1 Champions League win at Arsenal.
Berbatov hit the net nine times in 37 appearances last term as Monaco finished third in the league.
"Dimitar Berbatov showed all his talent and great professionalism," said vice president Vadim Vasilyev in a statement on Tuesday.
"He is clearly among the greatest strikers who have played for Monaco. We are proud of what he brought to the club and wish him the best in the future."
Berbatov scored 27 goals in 70 games for Tottenham Hotspur before Premier League rivals United bought him for 30.75 million pounds ($47.11 million) in 2008.
He scored 48 league goals in four seasons for the Old Trafford club before moving to Fulham where he spent nearly two seasons.
($1 = 0.6528 pounds)
(Reporting by Douglas Beattie, editing by Tony Jimenez)
