Forlan last played in the Hong Kong Premier League with Kitchee but has been without a club since May last year.
Forlan enjoyed a glittering career in Europe, turning out for the likes of Manchester United, Villarreal, Atletico Madrid and Inter Milan.
He wrote on Twitter: “After 21 years I made the decision to end my career as a professional footballer.
“A beautiful stage closes full of great memories and emotions but another of new challenges will begin.
“Thanks to all who in one way or another accompanied me on this path!”
After failing to find his feet in England with Manchester United, Forlan revived his career in Spain with Villarreal, where he won the European golden boot in the 2004/2005 season.
Forlan transferred to Atletico Madrid in the summer of 2007 as a replacement for Liverpool-bound Fernando Torres, helping the Rojiblancos to the Europa League title in 2010.
Forlan played 112 times for the Uruguay national team, scoring 36 goals and was named as the best player at the 2010 FIFA World Cup in South Africa.
Barcelona striker Luis Suarez, who won the Copa America with Forlan in 2011, paid tribute to his former international teammate, writing on Twitter: "Historic for Uruguayan football. Grateful for all the unforgettable moments you made all Uruguayans live, both in the national team and in all the teams you played."
"I will always be grateful for what you taught me, both on and off the field, a dream to have played with one of my idols. You will always be a legend in Uruguay. A lot of success in your new challenges, friend."
