Ballack, who returned to Bayer Leverkusen in 2010 but was left without a contract after last season, had been linked with a possible move to the United States or Australia.
"At the age of 36 I can look back at a long and wonderful time in professional football which I did not dare dream of as a child," he said in a brief statement issued through his lawyers.
"It was a privilege to have worked with top coaches and fantastic team-mates. Obviously I will miss playing in front of 80,000 people or scoring a goal."
It was a low profile exit for one of the best German players of his generation whose leadership abilities and passion for the game saw him stand out for every club he played.
"A great footballer, known around the world, is ending his career," said Germany coach Joachim Low, who had repeated run-ins with the player over the years.
"I got to know and appreciate Michael as a pillar in the national team and a very good player with outstanding qualities. On the pitch he radiated dominance."
A strong physical presence in midfield with a powerful shot, Ballack, who won 98 caps and scored 42 goals for Germany, got his breakthrough at Kaiserslautern and in 1998 helped them win the Bundesliga title, the first promoted team to do so.
"Michael Ballack was an exceptional player who contributed greatly to lifting the position of the DFB [German football association] and German football as a whole," said DFB President Wolfgang Niersbach.
A three-year spell at Bayer Leverkusen ended in 2002 with the team imploding and failing to win the Bundesliga after a Ballack own goal on the final matchday contributed to a surprise defeat to Unterhaching that cost them the league title.
The team also lost that year's Champions League final to Real Madrid and to Schalke 04 in the German Cup final in a season that earned them the nickname "Neverkusen".
Ballack then led Germany to the World Cup final against Brazil but the midfielder was suspended for the match which the South Americans won 2-0.
Ballack moved to Bayern in 2002 winning another three Bundesliga titles and three German Cups before signing for Chelsea where he stayed until 2010.
He won domestic titles in England but again tasted defeat when his team lost the 2008 Champions League final on penalties to Manchester United. The midfielder then steered Germany to the Euro 2008 final before losing to Spain.
He was briefly banned from the national team after a post-tournament row with Low but was reinstated for the 2010 World Cup qualifiers.
An injury just before the World Cup meant he missed the tournament in South Africa. Low did not recall him again, triggering a war of words in which Ballack accused him of lying.
Low had first stripped him of the captain's armband and then dropped him from the team, with the federation offering him the chance of a farewell appearance in a friendly against Brazil in August which the player instantly declined.
He won his last cap in March 2010 in a 1-0 friendly defeat to Argentina.
Ballack's return to Leverkusen proved unsuccessful with the player sidelined with injuries or benched under former coach Robin Dutt.
"The last few months without football showed me that the time has come to stop. I now look forward to a new chapter in my life and thank my family and all the amazing people who brought me forward, accompanied me and supported me. They all share part of my success," Ballack said.
