The talented left-back, who has long been seen as a potential Matildas prospect, tore her ACL in 2024 and has struggled with motivation since rehabilitating the injury.
The Sky Blues agreed to terminate Fenton's contract, which had two years remaining, to allow her to explore opportunities outside football.
"After doing my ACL in 2024, I found the rehab took a lot out of me and I've since seen my level of motivation to play drop," Fenton said in a statement.
"I'm looking forward to taking this break, focusing my attention elsewhere and coming back in the future to resume my professional career.
"Sydney FC have been so supportive of me making this decision, and I'm looking forward to re-discovering my passion for football again."
Fenton, 23, won a premiership-championship double in the 2022-23 season and a second championship in the 2023-24 season.
The defender has also previously played for the Young Matildas.
"As a squad and a club we are supporting Kirsty in her decision to take a break, and we offer her all of our support during this time," coach James Slaveski said in a statement.
"She will be welcome here at Sydney FC whenever she wants to train with the team and access the facilities here."
Sydney open their season against Adelaide on October 18.
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