The towering 2.29m (7ft 6in) star made the announcement, which had been widely expected, during a press conference in his home city of Shanghai after his last two seasons with the Houston Rockets were dogged by injuries.
Yao, 30, said he had "waited and hoped that I could return" from a broken foot last year.
"It was a frustrating period and many thoughts crossed my mind. Today I would like to announce my personal decision to formally retire as a basketball player," he said.
Yao added he planned to focus on his role as owner of the Shanghai Sharks, the team where he started his professional career and which he bought in 2009.
The NBA All-Star, who has used his fame to confront Chinese taboos ranging from the treatment of people with HIV to boycotting shark fin soup, said he would also promote philanthropy in China.
In a choreographed news conference, Yao stayed composed as he stood at a custom-made oversized podium and recalled receiving his first ball at age four and donning his father's old number at 16 for the Shanghai Sharks.
Yao then joined the Rockets as the first pick in the 2002 NBA draft amid scepticism about whether the signature product of China's massive state sports system would ever earn the affection of the league's fans.
But he won over Americans and became an adored national icon in China through his strong play -- when fit -- and his grace and poise. He was not China's first player in the NBA, but he was certainly the best-known.
He exhibited that same grace during his retirement announcement, switching to English to offer a "special thanks" to the city of Houston.
"I would like to thank you for giving me a great nine-year career," he said.
"Nine years ago I came to Houston as a young, tall, skinny player and the entire city and team changed me into a grown man, not only a basketball player."
Although his size was his strength, the rigours of top-flight basketball proved too much for Yao's massive frame and his career has been marked by lengthy absences from the court due to a succession of mostly foot and leg injuries.
Nonetheless, he was China's first global sports superstar with a personal brand valued at more than $1 billion.
The eight-time NBA all-star routinely tops Forbes' list of China's most valuable celebrities and his international appeal has in the past led to endorsement deals with Nike, Pepsi, McDonald's and China Telecom.
But the brand he has done the most to promote is the NBA. China has become the league's biggest market outside the US since he began playing with an estimated 300 million fans.
Fans had already begun mourning his departure as reports of his planned retirement emerged in recent weeks and on Wednesday Chinese web portals set up special pages for fans to pay tribute.
"For Yao, it's closing a circle. For basketball fans, it's a pity," Jason Zhu, a 28-year-old Shanghai civil servant, told AFP.
NBA commissioner David Stern praised Yao as a "transformational" player for the game.
"Since entering the league as the number one pick in the 2002 draft, Yao Ming has been a transformational player and a testament to the globalisation of our game," he said in a statement.
"His dominant play and endearing demeanour along with his extensive humanitarian efforts have made him an international fan favourite and provided an extraordinary bridge between basketball fans in the United States and China."
Fans and the media have engaged in feverish speculation on what the future might hold for Yao, who said he would devote more time to the Sharks and his philanthropic work, but offered no further specifics.
"Today I'm retired from basketball and a door has closed. But elsewhere another is opening and outside that door is a new world waiting for me to explore," he said.
"Even though I'm leaving the basketball court I am not leaving the game. The Shanghai Sharks is how my professional life will continue.
"I am continuing to learn about managing and running the team and will do my best to bring honour and glory to my hometown and to Chinese basketball."
