Pence, 37, is hitting just .096 with two home runs and six RBIs in 52 at-bats this season after rejoining the Giants in the offseason.
He had seemingly resurrected his career last season with the Texas Rangers when he hit .297 with 18 home runs and 59 RBIs and was selected as an American League All-Star.
He was part of two World Series-winning Giants teams, in 2012 and '14. He hit .444 with a home run and five RBIs in the Giants' seven-game World Series victory over the Kansas City Royals.
Giants manager Gabe Kapler said he simply needs to get more looks at younger players who might be a part of the team's long-term outlook.
"Perhaps the most difficult part of this job is telling a meaningful member of the Giant family that he's not going to be on our roster going forward,'' Kapler said. "It was a very difficult conversation last night. Hunter meant so much to this team and this community.''
The four-time All-Star has a career average of .279 with 244 home runs and 942 RBIs in 1,707 games over 14 seasons, including eight with the Giants. He also has played for the Houston Astros, Philadelphia Phillies and the Rangers.
In other moves Sunday, the Giants reinstated right-hander Sam Coonrod from the 10-day injured list and acquired infielder Daniel Robertson from the Tampa Bay Rays for a player to be named later. Robertson was assigned to the Giants' alternate training site.
The Associated Press contributed to this report.