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The 36-year-old made 676 appearances for the Red Devils, the last as a substitute in their 3-1 Champions League final reverse to Barcelona Saturday.
Scholes won 10 Premier League titles with United and helped them to two Champions League triumphs.
He won 66 England caps and played at the 1998 and 2002 World Cups, but quit international football in 2004 at the age of 29.
But with his club form still impeccable, England coach Fabio Capello reportedly tried to persuade him to return for last year's World Cup campaign in South Africa.
This was not a decision that I have taken lightly but I feel now is the right time for me to stop playing
Announcing his retirement, Scholes told the official club website:
"This was not a decision that I have taken lightly but I feel now is the right time for me to stop playing.
"To have been part of the team that helped the club reach that 19th (record) title is a great privilege.
Scholes praised Alex Ferguson, calling him a "great manager" and the United boss reciprocated.
"What more can I say about Paul Scholes that I haven't said before," said Ferguson.
"We are going to miss a truly unbelievable player.
Paul has always been fully committed to this club and I am delighted he will be joining the coaching staff from next season."
Scholes was part of the famous "Class of 92" which claimed the English FA Youth Cup in 1992 and included David Beckham, Nicky Butt and Gary Neville, who quit his United career earlier this season.
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