The 22-year-old made 12 appearances for Town and scored four goals – all in the EFL Trophy – including his first senior hat-trick in the 4-3 win at Crewe.
But Tracey, signed by Sam Ricketts from Premier League Spurs, started just once in League One under Shrewsbury, in the defeat at Ipswich in November.
He also started just once under Steve Cotterill, in the 4-1 Trophy exit to Lincoln, but was influential in some of his five cameos from the bench under the current boss, most recently as a substitute at Southampton in the FA Cup last week.
The winger has immediately been sent out on loan to Cambridge, who are top of the pile in League Two.
Tracey is the latest loan to depart the club, after Scott High, Marlon Fossey, Matt Millar and Jan Zamburek with goalkeeper Deyan Iliev also returning to Arsenal.
Town now have three loanees on the books, first-choice keeper Matija Sarkic and new boys Harry Chapman and Matthew Pennington, leaving the club room to manoeuvre in the final week of the transfer window, with five loans permitted in a league matchday squad.