Terry, 37, who won 78 England caps, five Premier League titles with Chelsea, five FA Cups and three League Cups, rejected a move to Russian Premier League giants Spartak Moscow last month.
He captained Aston Villa last season and the Championship club want him in their new-look coaching staff, with Thierry Henry in pole position to become manager this week.
"After 23 incredible years as a footballer, I have decided now is the right time to retire from playing." Terry wrote on Instagram.
"I have many people to thank. My wife Toni and my two children, Georgie and Summer, for being my rocks throughout my career – I couldn’t have done it without you, I love you with all my heart.
"I thank my parents, Sue and Ted, for the sacrifices they made for me as a boy, giving me the best opportunity to fulfil my dream and become a professional footballer. My brother, Paul, for his help and advice throughout my career – and all my family and friends for their great support.
— Chelsea FC (@ChelseaFC) October 7, 2018
He added: "As a 14-year-old, I made my best and biggest decision: to sign for Chelsea Football Club. Words will never be enough to show how much everyone at the club means to me, in particular the fans. Right from the outset they have given me total support, on and off the pitch, and I have a tremendous bond with them.
"We achieved so many great memories together and I couldn’t have succeeded without you. To me, you are the best fans in the world. I hope I have done you all proud wearing the shirt and the armband.
"My club career and heart will always belong to Chelsea, but I am grateful for my loan spell at Nottingham Forest in 1999, which was invaluable for my development as a young player.
"And I also want to say a huge thank you to Aston Villa for giving me the opportunity to play at such a big club and captain it throughout the 2017-18 season. It was a privilege to represent such a renowned football club with great fans. I look forward to the next chapter in my life and the challenges ahead."