Franchitti, 40, was severely injured during a race in Houston and he said in his announcement that his doctors had advised he give up racing.
In addition to his success at Indianapolis, Franchitti has won the IndyCar series championship a record four times.
Franchitti's car came in contact with the one driven by Takuma Sato during the Houston race and sailed into a catch fence on the street circuit. Debris from the wreck sailed into the grandstand.
Doctors said he suffered a broken right ankle, fractured two vertebrae, cracked two ribs and suffered a concussion. He had two surgeries on the ankle.
"Since my racing accident in Houston, I have been in the expert care of some of the leading doctors and nurses, all of whom have made my health, my safety and my recovery their top priority," Franchitti said in his statement. "I am eternally grateful for the medical care I have received over the last several weeks. I'd also like to thank my family and friends for their unbelievable support.
"Based upon the expert advice of the doctors who have treated and assessed my head and spinal injuries post accident, it is their best medical opinion that I must stop racing. They have made it very clear that the risks involved in further racing are too great and could be detrimental to my long term well-being. Based on this medical advice, I have no choice but to stop."
Franchitti won 31 IndyCar races, which puts him eighth on the all-time list.
Notable deaths of 2014 [PHOTOS]