Phillips, 40, is one of the oldest players to appear in the Premier League.
He made five substitute appearances for Palace this season but has not played since their 4-1 home defeat against Fulham in October.
Pulis, speaking to reporters before Palace's London derby at Tottenham Hotspur on Saturday, explained: "He had a six-month contract and that has run out.
"I had a good chat with Kevin and he wants to get closer to home, which is the Midlands, which I understand."
Phillips, who made his league debut for Watford nearly 20 years ago and has played for eight clubs, scored with an extra-time penalty against Watford to give Palace a 1-0 win in the Championship playoff final at Wembley in May which sealed their return to the Premier League after an eight-year absence.
Pulis also said that winger Jimmy Kebe is joining Championship club Leeds United on loan for the rest of the season and that he was looking to bring in new players in the January transfer window to boost their chances of avoiding an immediate return to the second tier.
"The important thing at this football club is that we bring players in who have got something to prove," said the Welshman who has seen results improve since he took over from Ian Holloway in November.
"I don't want to be bringing players in who are just going to turn up and jog through the next six months. I need players who are going to roll their sleeves up and work hard and add to what we have got already."
Palace are currently 18th in the 20-team league with 17 points from their 20 games and visit sixth-place Spurs on Saturday.
The north London club won the return fixture 1-0 at Palace on the opening day of the season.
(Reporting by Mike Collett; editing by Toby Davis)
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