The 24-year-old world number three had laboured to a 6-4 7-5 defeat against David Ferrer in his opening Group A match on Monday, after which he revealed that he had suffered a groin strain while practising for the prestigious eight-man tournament at London's O2 Arena.
Murray's chances of recovery looked bleak when he failed to keep his allotted booking on the practice court on Tuesday and after chatting with his team the Scot decided to pull out of the tournament rather than risk further injury.
On-site alternate Janko Tipsarevic of Serbia will take Murray's place for the final two group matches against Tomas Berdych and world number one Novak Djokovic, and will inherit the Briton's record so far.
"I was told I would have to take a week to 10 days off and I just didn't have a chance to recover," a downcast Murray told reporters at a news conference.
"I never want to pull out of tournaments, especially one this size. But it's a decision I kind of had to make because I was probably going to do more damage to myself."
Murray's form since the US Open, including his 17-match winning streak which included three consecutive titles in Asia, had raised hopes that he could win in London.