The popular 31-year-old defender, who joined the Premier League club from AC Milan in 2004, said he could not really believe he was sitting in front of journalists announcing his decision.
"It is so weird, so strange sitting here making this announcement that I am not going to be able to play football anymore," he said.
"Five months ago I was flying, I was on top of my game," he added.
"But I can't recover from my injury - so I've got to retire. I've spent a while making up my mind, thinking about things. Deciding whether I wanted to go ahead with an operation and see if I could come back or whether I should retire.
"It would have been a big and difficult operation. At this point, I think it's better for my health and future life to say: 'That's it.'
DEFENSIVE QUALITIES
Although he played in every Premier League game for the club last season and the first 18 league games of this season until he suffered his latest injury against West Ham United in December, he has suffered long spells out of the side.
In total, he only managed 91 appearances for Villa. However his outstanding defensive qualities - and his eye for the occasional goal - endeared him to the Villa fans.
"The retirement of the lionheart defender will be a huge loss to the players, the manager and the fans," a statement on Villa's website said on Friday.
Laursen, who began his career with Danish club Silkeborg, made 53 appearances for Denmark before announcing his retirement from international football earlier this year.
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