Schumacher's retirement was on the cards after Mercedes announced that Lewis Hamilton would replace him in the side although it was speculated that the German legend may join Sauber for the next season.
"I decided to retire by the end of the year 2012. At some point, it is time to say 'good bye'. I still feel I am capable of competing against the best but the time sometimes comes to say goodbye and this time it might be forever," he said at the Mercedes AMG Petronas F1 team motorhome.
"I had been thinking about whether I had the necessary motivation to carry on but I do not want to do something I am not 100 per cent committed to. Having made the decision I now feel a release," the 43-year-old German champion added.
Schumacher's first stint in F1, between 1991 and 2006, saw him enter the sport's record books, winning seven world titles and 91 races.
He dominated the F1 world at the start of 20th century when he won five world titles in a row from 2000-2004.
Schumacher made his debut at the Belgium Grand Prix in 1991 and won 91 GPs in his career. He first retired in 2006 but made a comeback with the Mercedes team in 2010.
Schumacher will be remembered for helping revive Ferrari's fortunes after joining the Prancing Horse in 1996 as part of the 'Dream Team' along with Ross Brawn, Jean Todt, Rory Byrne and Paolo Martinelli, winning five straight titles between 2000 and 2004. More