Lee, who was diagnosed with early stage nose cancer last year, said he opted to retire after being told by doctors that his body could no longer take the intense training needed for high-level competition.
"It was a very heavy decision for me because I really love this sport, but the important thing now is my health," he told a news conference before breaking into tears.
Lee is one of Malaysia's most popular and successful sportsmen. In 2006, he reached the number one ranking, a position he would go on to hold for a record 348 weeks in total.
He took a break from competition last September for cancer treatment, but returned to training in January with the goal of attaining Malaysian's maiden gold medal at the 2020 Tokyo Olympics.
Months, however, passed without any sign of Lee returning to competition. His ranking slipped to 191 in the world, erasing hopes that he would be able to qualify for Tokyo.
While he will no longer be competing, Lee said he will still be heading to Japan in 2020 as Malaysia's chef de mission for the Games.
"I couldn't get (the gold medal), but I hope Malaysian athletes can get one gold for Malaysia – that will also be my dream," Lee said.
Lee holds 69 singles titles but success at major championships has eluded him and he has often come up short against his arch-nemesis, China's Lin Dan.
Their rivalry, though lopsided, is widely considered the greatest in the game.
Lin leads 27-12 in their head-to-head encounters, defeating Lee twice each at the Olympics and the world championship finals. At Rio in 2016, the Malaysian lost out to China's Chen Long in a nail-biting final.
Lee was issued an eight-month backdated ban in 2015 for a doping violation and was stripped of his silver medal from the 2014 World finals, a period he described as "the toughest memories of his life".
Lee said he was looking forward to life post-retirement and planned to take his wife, who he wed in 2012, on a long-overdue honeymoon.
"My career is like a rollercoaster, up-and-down," the father of two said. "I think this is the time for me to take a rest, take my wife for a holiday."
(Reporting by Rozanna Latiff; editing by Sudipto Ganguly)
