Forsberg, 37, told reporters Monday in Denver his bid to get back into the game after a nearly three-year absence is over.
"It was not an easy decision," an emotional Forsberg said. "I would really like to thank the (Colorado) organization for everything they've done for me."
The former league MVP signed a contract to return to the Avalanche this month and made his first NHL appearance since April 29, 2008, Friday against the Columbus Blue Jackets after declaring himself fit to play despite persistent foot problems.
He also played Saturday against Nashville, finishing the two games with a minus-4 rating.
"We were proud to offer him the opportunity to come back and play for the Avalanche and certainly respect his decision," Avalanche General Manager Greg Sherman said. "We wish him all the best."
The team announced it will retire Forsberg's No. 21 jersey in a ceremony set for next season.