The former Ireland captain had hoped to start playing for his new club Toulon after he recovered from a serious hamstring tear suffered against France in last autumn’s World Cup.
Today’s news means he will cancel his contract with the French club without playing a game.
In a statement O’Connell said: “It is with deep regret that I have decided to retire from professional rugby following medical advice.”
“I would like to take this opportunity to thank all at Rugby Club Toulonnais for their understanding and support over the past few months. Unfortunately this will no longer be possible.”
In a remarkable career, the Munster man won three Six Nations titles with Ireland including a Grand Slam.
In his club career, O’Connell was a vital member of a team that won two European Cups and three Celtic Leagues.
In 2013 he took over as Ireland captain from Jamie Heaslip.
The statement went on to say:
“I have been blessed to be a professional rugby player for over 14 years and to be part of Munster and Ireland teams that have experienced success. I have played with some of the best players to ever line out in the red of Munster and the green of Ireland and have had the privilege of captaining my country.
“I would like to thank those at Young Munster RFC, Munster Rugby, the IRFU and Lions Rugby who have supported me over the course of my playing career. Special thanks must go to my wife Emily for her unwavering support through the good and the bad and to my parents Michael and Shelagh.
“Lastly I would like to thank everyone who has supported the teams I have been a part of. The support you have shown me is humbling and an immense source of pride for both myself and my family.”