The Moroccan-born 40-year-old had been plagued by foot injuries and his last marathon was in New York in 2007.
"It was really my feet that betrayed me," Khannouchi told the website LetsRun.
"Every time I go and try to push hard, I get the pain and soreness again. I can't train hard and if you can't train at a certain level where you can be competitive it's not worth it to keep wasting time."
Khannouchi, who became a US citizen in 2000, set a marathon world record of two hours five minutes 42 seconds in Chicago in 1999, becoming the first man to go under 2:06.
He then bettered his mark in London in 2002 with a time of 2:05.38, beating Kenya's Paul Tergat and Ethiopian Haile Gebrselassie.
Khannouchi won the Chicago marathon four times between 1997 and 2002 and London once but never raced at an Olympic Games.