Mashrafe's decision came just before the first match of the series against the home side in Colombo's R. Premadasa Stadium.
"It has been a great honour for me to represent Bangladesh in T20I for more than 10 years," Mashrafe said on his official Facebook page.
"I believe that this team is currently a balanced one and there are some promising young stars.
"This is high time for me to say good-bye to T20 format so that many youngsters can get the opportunity to showcase their talent", he said.
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Beloved by fans, the 33-year-old played 52 Twenty20 internationals to claim 39 wickets and score 368 runs.
He led Bangladesh in 27 of his 52 Twenty20 internationals and won nine matches.
But he was hobbled by knee injuries during much of his career, forcing him to avoid Test cricket since 2009 and to undergo a series of operations in Australia.
Bangladesh selectors welcomed his decision to retire from Twenty20 international cricket.
He will now play his final Twenty20 international against Sri Lanka on April 6 in Colombo.
He is expected to continue to lead Bngladesh in one-day internationals.
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