The Magners League Champions have signed Samoan scrum-half Kahn Fotuali'I from Super Rugby side the Crusaders for next season, while Phillips has played second fiddle to youngster Rhys Webb over recent months.
While Phillips remains first-choice for the Welsh national side, his international commitments and inconsistent form means he is yet to start a Magners League fixture in 2011.
"After continued requests from Mike over the last 18 months, we've agreed to let Mike go as soon as he can find another club," said Ospreys director of rugby Scott Johnson.
"I think it gets to a stage where within an organisation, anyone who doesn't want to be here will move on.
"It's the modern player. Sadly that's the way the sport's going and I'd rather have people here who want to be here.
"What tends to happen is after a while, you're spending so much of your time and energy on so few players and we've got a good young nine (Webb) coming through who needs our attention as well, so it's pretty simple."
Phillips hasn't been at his best since returning from his first Lions tour in the summer of 2009 but the level of his performances in South Africa ensure that he remains one of the hottest properties in the world game.
The 28-year-old started all three Tests for Britain and Ireland's elite and was recognised as one of Sir Ian McGeechan's star performers throughout the 10-match tour.
He could now become the latest in a line of Lions tourists to leave the Liberty for a French adventure after Lee Byrne agreed a move to Clermont Auvergne, James Hook signed for Perpignan and Gavin Henson left for Toulon via Saracens.
Reigning European Champions Toulouse are the early favourites to sign the former Llanelli and Scarlets player who joined the Ospreys from Cardiff Blues in 2007.
The Ospreys have held on to the services of fellow Lions Shane Williams and Alun Wyn Jones, however, and Johnson has made it clear that the players he wanted to remain in Swansea are doing just that.
"We've kept the people we really wanted to keep and fought hard for and there will be more announcements shortly," added Johnson.
"These are changing times and we've got to confront them.
"We've got to get back to what we've been known as and we've done a lot of great things.
"We want to represent our region in the way we're comfortable as and there's no coincidence we produce so many international young kids and we want to continue that.
"It's a balancing act and if that means us reinventing ourselves, we'll do so."