The 35-year-old, who last played for Turkish club Besiktas, has been without a club for the past eight months.
According to Spanish sports daily AS, Guti has decided to hang up his boots after deciding against a move to London club West Ham United.
Guti came up through the youth ranks of his hometown club and made his Real debut in 1995. He went on to make more than 500 appearances for the Spanish giants, winning five La Liga titles and the Champions League three times.
That number of appearances could potentially have broken the 1,000-match mark, but a career ravaged by injury and uneasy relationships with several managers meant he only played around half of the games Real contested during his long time at the club.
The mercurial playmaker ended his 24-year association with Real in 2010 when he joined Besiktas, but he plans to return to Madrid to complete his coaching qualifications at the club's Valdebebas training complex.