"This was not a decision that I have taken lightly but I feel now is the right time for me to stop playing," Scholes said on the club website.
"To have been part of the team that helped the club reach that 19th (league) title is a great privilege."
Scholes will take up a coaching role at the club he spent his entire career and he will make one final appearance in a United shirt for a testimonial in August.
The combative midfielder made 676 appearances for United, picking up 10 Premier League winners' medals as well as helping his club to three FA Cups and two Champions League titles.
"I am not a man of many words but I can honestly say that playing football is all I have ever wanted to do and to have had such a long and successful career at Manchester United has been a real honour," Scholes added.
Manager Sir Alex Ferguson had spoken previously about hoping to persuade Scholes to follow in the footsteps of 37-year-old midfielder Ryan Giggs in signing on for another year.
Instead, Scholes follows goalkeeper Edwin Van der Sar into retirement and presents Ferguson with another big hole to fill.
"We are going to miss a truly unbelievable player," Ferguson said.
"Paul has always been fully committed to this club and I am delighted he will be joining the coaching staff from next season.
"Paul has always been inspirational to players of all ages and we know that will continue in his new role."
