The Midlanders failed to get any value on their £6 million purchase from Dynamo Zagreb, who was loaned back to his homeland last season.
Villa have cut their losses on the 25-year-old, who has only represented the club's first team on eight occasions, never starting a Premiership game.
"Agreement has been reached today with player, Bosko Balaban, whereby his playing contract has been terminated with immediate effect," said a statement released on Villa's official website.
"The original five-year contract had two years and seven months still to run."
It has been stressed that the move will save the Premiership club a considerable amount of money.
"As a consequence, Aston Villa will recognise, in the financial year ended May 31, 2004, a pre-tax player trading loss on the termination (after deduction of the unamortised costs) of £3.2 million.
"However, Aston Villa will benefit from substantial savings in wages and future amortisation costs. In cash terms, this represents a saving of £2 million spread over the remaining term of the contract."
Meanwhile, Peter Enckelman has extended his stay with Blackburn Rovers for a second month.
The Finn is number two at Ewood Park, behind Brad Friedel, and will continue to provide cover for the United States international.
