The versatile defender has struggled with injury of late and, having made just four starts for Inter this season, had been reported to be calling it a day at the end of the campaign.
Inter president Erick Thohir stated Zanetti would become "part of the management" next season and the five-time Serie A winner on Tuesday confirmed his decision to retire and take up the role of sporting manager at San Siro.
The former Argentina international, who joined Inter from Banfield in 1995, has been unable to fully recover from an Achilles injury and has now opted to call time on his career.
"I feel that now is the right time to do it," he told La Nacion.
"Because football has given me so much and I have enjoyed every moment. Because after the Achilles injury last April, I wanted to demonstrate that I could return and be competitive, but I could not.
"I feel complete and have realised - to retire at 40 is a priceless feeling. For me it is something that has immense value, and now is the right time."
Zanetti is relishing the opportunity to remain at Inter in a new capacity.
"I dreamed of finishing my career at Inter, in my home, and I have. It was a lifestyle decision to end the career in Italy, and now, in the function of a sporting manager, I will try to be useful to the team away from the field," he added.
"A new world opens for me, and that excites me. There will be a thousand things to do."
As well as five Serie A winners' medals, Zanetti also won the UEFA Champions League and the Coppa Italia four times during his playing days at Inter.
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