O'Connell, who has led Ireland to back-to-back Six Nations titles, was contracted with his home province until June 2016 but requested an early release.
The Irish Times reported last week that he was set to join European champions Toulon while the Irish Rugby Football Union said on Tuesday that he would quit the international arena after the World Cup.
"After the World Cup I would like to experience new environments, and it is my genuine hope and ambition that I will have some future involvement with Munster and Irish Rugby," said O'Connell who has won 101 caps.
"I have been hugely fortunate to play with one of the greatest sporting organisations in the world and as a proud Limerick, Munster and Irish man I will forever treasure my association with Munster Rugby," he added in a statement.
The towering second row became only the fourth Irish player to win 100 caps, behind Brian O'Driscoll and former Munster team mates Ronan O'Gara and John Hayes, during this year's Six Nations championship.
He was also voted player of the tournament after Ireland retained the title on points difference after a compelling final day.
O'Connell was part of the Munster team that won two European Cups in 2006 and 2008, ending years of near misses for the province and launching a dominant period for Irish teams in Europe.
"Paul's contribution to Irish rugby is immeasurable in terms of not only driving success on the field but also raising the profile of Irish Rugby around the world," said IRFU chief executive Philip Browne.
Captain of the British and Irish Lions during their 2009 tour of South Africa, the 35-year-old returned from serious injury to become a Lions' tourist for the third time during the successful 2013 series in Australia.
O'Connell has agreed a deal to join Toulon after the World Cup on a two-year contract and will finish his playing career in France, the Irish Times said, quoting a French source.
Toulon secured an unprecedented third successive European title last month and O'Connell would be the latest of an expensively-assembled team of 'galacticos', where he could also be joined by Australian playmaker Quade Copper.
(Editing by Toby Davis)
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