Yao said he would join up with Chinese team the Shanghai Sharks, possibly in the role of general manager.
The 30-year-old is the NBA's most famous Asian player. Injuries forced him to miss the 2009-2010 season.
His retirement was expected, after widespread media reports in the US last week.
He told a news conference in Shanghai that the past six months had been "agonising" as he weighed up his future in the game.
"I had been thinking over and over. Today I am announcing a personal decision: ending my career as a basketball player. But one door is closing and another one is opening," he said.
Yao had missed an estimated 250 regular-season games - roughly half of Houston's schedule - in the last six seasons with a number of foot and ankle injuries.
Analysts say Yao has had a huge international impact on the game and was a driving force behind the NBA establishing a China venture in 2007.
NBA official David Stern said in a statement that he looked forward to continuing to work with Yao in some capacity in the future.
"Yao Ming has been a transformational player for our league and a source of enormous pride to the people of China and people of Chinese descent in the United States," he said.
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