O'Connell, whose retirement from international rugby came sooner than he had hoped when he suffered a serious hamstring injury during last year's World Cup, had intended to play on after signing for Toulon before the tournament began.
But the hamstring tear, which O'Connell said he instantly feared had ended his career, was too severe to get back to the same level again.
"Since sustaining the injury I have been fully focussed on returning to fitness and starting an exciting new chapter for both myself and my family in Toulon. Unfortunately, this will no longer be possible," O'Connell said in a statement released by the Irish Rugby Football Union.
"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 Toulon for their understanding and support over the past few months."
In a decorated 14-year career with his native Munster, the towering 36-year-old lock forward was part of one of the great teams in club rugby who won European Cup in 2006 and 2008, launching a dominant period for Irish sides in the competition.
Captain of the British and Irish Lions on their 2009 tour of South Africa, O'Connell returned from a near career-ending back injury to represent the Lions for the third time during the successful 2013 series in Australia.
Cruelly, that tour was cut short too when O'Connell broke his arm before the second test.
He became only the fourth Irish player to win 100 caps, alongside Brian O'Driscoll and former Munster team mates Ronan O'Gara and John Hayes, eventually playing 108 times and winning three Six Nations titles and a grand slam.
"Really disappointing to see Paul O'Connell having to retire. Sensational career in Red and Green. Simply irreplaceable," O'Driscoll, whose retirement in 2014 was greeted with similar adoration at home and abroad, said on Twitter.
O'Connell said he may look at coaching or a career in "the real world".
"I have been blessed to be a professional rugby player for over 14 years. I have played with some of the best players to ever line out in the red of Munster and the green of Ireland," O'Connell said in an interview with national broadcaster RTE.
(Editing by Ed Osmond)
