Mercedes announced last week that Schumacher would be replaced by Lewis Hamilton next season, and while there was speculation the 43-year-old German could move to Sauber, he instead announced on Thursday that he would end his racing career.
"Basically, I've decided to retire at the end of the year," Schumacher said at the Japanese Grand Prix. "Although I was able and capable of competing with the best drivers that are around, at some point it's time to say goodbye and this time it might be forever."
Schumacher holds the record for championships and grand prix wins, with 91. He began his career in 1991 and won two titles with Benetton then five for Ferrari. He initially retired in 2006 then came back with Mercedes in 2010. The comeback has not lived up to expectations, with just one podium finish.
"It's without doubt that we did not achieve our goals to develop a world championship fighting car," Schumacher said. "But it is also very clear I can be happy with my overall achievements."
Mercedes team boss Ross Brawn paid tribute to Schumacher. Brawn was also chief strategist at Ferrari when Schumacher and the Italian team became so dominant that the sport's authorities made several rule changes to spice up the level of competition.
"He's the most courageous racing driver of the century," Brawn said "And I feel very privileged to have worked with Michael from the beginning."
Schumacher said he hasn't decided what he will do after the season, saying he just wants to focus on the final six races. He has struggled this season, and was issued a 10-place grid penalty at Suzuka for causing a spectacular crash with Toro Rosso's Jean-Eric Vergne during the Singapore GP.
"There is no point in the need to make any decisions right now," Schumacher said. "I have options obviously but whatever it will be will be made in time."
Schumacher acknowledged he considered retiring even before the announcement of Hamilton's move to Mercedes.
"During the past month I was not sure if I still had the motivation and energy which is necessary to go on," Schumacher said. "It is not my style to do something which I am not 100 per cent feeling for."
Schumacher holds the record for the most races won in a single season, with 13 in 2004. In 2002, he became the only driver in F1 history to finish in the top three in every race of a season, and set the record for most consecutive podium finishes.