The 35-year-old Munster forward has experienced ongoing medical issues as a result of the knee injury that forced him out of contention for last autumn's World Cup in New Zealand.
He won 72 caps, including being an integral part of Ireland's 2009 Six Nations Grand Slam team, and played in three Tests for the British and Irish Lions later that year.
Wallace played more than 200 times for Munster, helping them to be crowned European champions in 2006 and 2008. His 86th and final Heineken Cup appearance came in last month's quarter-final against Ulster.
"Although it's disappointing that injury is forcing me to retire now, I take great comfort that I've had an unbelievably enjoyable career," Wallace told the official Munster website.
"I feel very lucky to have been involved in an era that has seen Munster and Ireland enjoy so much success.
"Professional rugby has exploded in popularity and changed beyond all recognition in this country since I began, and I feel honoured to have played witness to its massive improvement."