The 31 year old midfielder, who played for City for four seasons, had been offered a year's contract on vastly reduced wages from what he was on last season and has opted to seek employment elsewhere.
Six clubs are reportedly interested in Hughes.
Speaking to the club website, Ray Ranson said: "We have not renewed terms with Stephen, who has been an excellent servant to Coventry City. "The manager has had to make a lot of decisions regarding his playing squad for next season and this is one of them.
"In my time here I have found him to be an influential character in the dressing room. He has been a good person to have around the club and we wish him all the very best for the future."
Having signed Hibs midfielder Guillaume Beuzelin on a free transfer last week, Chris Coleman is seeking to boost his midfield and goalkeeping situations.
This week, Coleman and his backroom team have spoken to a number of players and have said that they would like to sign Icelandic international midfielder Aron Einar Gunnarsson and a youngish keeper with Andy Marshall not likely to be back for pre-season training and Dimi Konstantopolous out until the New Year.
Coleman remains hopeful that he will have some major signings in place before City start their league season on August 9th.