The 37-year-old, who stepped down from Italy duty after last year's humbling World Cup group stage exit as holders, has ended his time with Dubai's Al Ahli because of a recurring knee injury.
"It's a sad day since football has been very much part of my life for the last 20 years, but then there is nothing I could do," the former Parma, Juventus, Inter Milan and Real Madrid player told reporters.
"I have decided to stop playing after a medical examination in Italy last week. Doctors have told me clearly that I can no longer play.
"Injuries are part of a sportsman's life, but then life moves on. Every sportsperson in the world has to make a decision one day. And today is the day for me."
He is the only defender to win the FIFA World Player award after his calm, authoritative captaining and defensive play led Italy to glory in 2006.
Four years on, however, and he looked a completely different player in South Africa last year with age catching up with him and exposing his lack of height and pace.
Cannavaro, who had signed a two-year deal with Al Ahli in June last year, made 16 appearances for the Dubai club and scored two goals.
He will continue with the club as a technical advisor and brand ambassador as part of a three-year agreement.
"I am really happy that the club has offered me a new contract. I can't say at this moment what exactly my role would be, but I am very excited with the new offer," he said.
"My family and I feel at home in Dubai."
Saeed Al Naboodah, chairman of Al Ahli, said: "We are really disappointed that Fabio cannot play for our club. He enjoys an impressive CV and we are delighted to continue our association with him."
