"It was no easy decision," the 35-year-old, who also played at Liverpool and Real Madrid, told Bayern Munich television.
"But it was the right moment. I always wanted to end my career earlier rather than too late. I still feel good so I think this is the right time."
The Spaniard started his career at Basque club Real Sociedad before moving to Liverpool in 2004 and establishing himself as a crowd favourite after scoring a 3-3 equaliser against AC Milan in the 2005 Champions League final.
Liverpool had battled back from 3-0 down and eventually won on penalties in one of the most spectacular comebacks in top-level football.
Alonso earned even more trophies at Real following a 2009 move, including another Champions League title to add to the Spanish League crown and two Spanish Cups.
Known for his passing game, vision and powerful shot as much as for his work ethic, Alonso became one of the most versatile midfielders of his generation, also winning the World Cup and two European Championships with the Spanish national side.
"I really lived it all. At Real Sociedad, Liverpool, Real Madrid or Bayern Munich," said Alonso, who joined the German champions in 2014 and has added two Bundesliga titles and a German Cup to his collection.
"Then there is also the national team. I never thought I would have such a great career and I hope there are still some more things to be added to those."
Bundesliga leaders Bayern are chasing a treble of titles after advancing into the Champions League quarter-finals this week with a 10-2 aggregate demolition of Arsenal.
(Reporting by Karolos Grohmann; Editing by Jon Boyle)
