The 35-year-old Munster back-rower was injured in a tackle during Ireland's pre-World Cup warm-up game with England in August 2011 - ruling him out of the tournament.
Wallace also missed the entirety of Ireland's RBS 6 Nations campaign but returned briefly for Munster and appeared in what proved to be his final game against Ulster in the Heineken Cup quarter-final defeat in April but has struggled to return to full fitness.
Wallace retires with 72 Ireland caps to his name since making his debut against Argentina in 2000 and revealed he's taken comfort in what he's managed to achieve in the game.
"Although it's disappointing that injury is forcing me to retire now, I take great comfort that I've had an unbelievably enjoyable career," said Wallace.
"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.
"I'd like to thank anyone who has helped me and had faith in me during my 15-year professional career including family, team-mates, coaches, medics, friends and not least the supporters.
"I will be looking to step away from rugby and explore a few different business opportunities while also looking forward to being able to spend more time with my wife Aileen and sons Andrew and Harvey."