The 41-year-old Russian made the announcement at a news conference on Thursday in the southern Spanish town of Linares, which hosts a prestigious tournament every year.
The chess world has been bitterly divided since 1993 into two rival federations with rival champions, and Kasparov said he was disappointed with a failed campaign to reunify the title.
He said he would continue to play chess, write books about it and take part in tournaments, such as so-called knockout events in which he plays many opponents at once, or in speed-chess games. But he is saying goodbye to lucrative, top-level professional play.
"It is a hard decision to make because I have reached the top, thanks to my passion and love for chess," Kasparov said, his voice quivering with emotion.
He said he also wanted to get active in politics in Russia and denounced President Vladimir Putin as a "dictator."
Kasparov has dominated chess for the past 20 years with an aggressive style that shuns settling for a draw.
In the chess world he is known as "the beast from Baku," a reference to where he was born, the capital of the former Soviet republic of Azerbaijan.
As Kasparov left the news conference, his constant travel companion on the international circuit - his mother Klara - wept openly, the news agency Efe said.