Ballack, who left Bayer Leverkusen at the end of last season, confirmed the news via a statement from his lawyer.
"At 36 years old I can look back on a long and wonderful time in professional football, which I could never have dreamed of as a child," Ballack said.
"It was a privilege to work with world class coaches and fantastic players. Now I am looking forward to a new chapter in my life."
The midfielder won 98 caps for Germany, scoring 42 goals, during a career that saw him establish a reputation as one of Europe's finest players in his position.
In four seasons with Chelsea following his arrival at Stamford Bridge on a free transfer from Bayern Munich prior to the 2006 World Cup, Ballack won one Premier League title, three FA Cups and one League Cup.
He made 167 appearances for the West London club, scoring 26 times, but suffered disappointment in 2007-08 when Chelsea lost in the finals of the Champions League and League Cup, as well as finishing second in the league.
The treble disappointment brought to mind a famous campaign at previous club Leverkusen when they surrendered a five-point lead with three games to play in the league and then lost the German Cup and Champions League finals in 2001-02.
However, after moving to Bayern the next season he won three German titles and three German Cups in a wildly successful spell in Bavaria.
Ballack won his first Bundesliga title in 1998 when, following a move from Chemnitz FC, he helped Kaiserslautern become the first promoted side to win the league in their first season back in the top flight.
He was named German Footballer of the Year on three occasions and at international level represented Germany at Euro 2000, 2004 and 2008, and the 2002 and 2006 World Cups.
However, an injury suffered in the 2010 FA Cup final forced him to miss the following World Cup and in his absence Joachim Loew discovered a vibrant young team that had no room for one of the greatest German midfielders of his generation, leaving him two caps short of a century.