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The German made the announcement after winning the Italian Grand Prix to reduce title rival Fernando Alonso's lead to just two points.
The Ferrari star's victory was the 90th in a career in which Schumacher has broken almost every F1 record.
BBC:__________________________________________________________
Andrew Benson
Motorsport editor
Michael Schumacher will head into retirement at the end of this season as the most successful Grand Prix driver of all time, but whether he will be regarded as the greatest is another matter altogether.
On pure talent and accomplishments alone, Schumacher belongs in the same bracket as the very best in the history of the sport - the likes of Juan Manuel Fangio, Stirling Moss, Jim Clark, Jackie Stewart, Gilles Villeneuve, Alain Prost and Ayrton Senna.
But greatness is about more than ability and trophies. It is also about character and integrity, and that is where Schumacher's claim falls down.
Many of Schumacher's greatest races - breathtaking against-the-odds performances such as his victories at Barcelona 1996, Belgium 1997, Hungary 1998 and Canada 2003 - will go down in the annals of the sport.
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But with all the wonder of Schumacher's talent, and his down-to-earth private persona, comes a dark side. The two are inseparable. And that is what tarnishes his legacy.
Too often - particularly so for one of his talent - Schumacher has relied on the unfair advantage to win, either created by himself with controversial manoeuvres on the track or in various means by his backers off it.
Sadly, the length of the list of these incidents rivals that of his best drives.
Few would have said Damon Hill deserved to be world drivers' champion in 1994 more than Schumacher, but the circumstances in which the German won his first title clouded the achievement.
And there have been few years since then in which Schumacher has not been involved in some row or another.
In the first few seasons of his career, as Schumacher protested his innocence in these incidents, many observers were prepared to give him the benefit of the doubt.
But, as the evidence has stacked up against him, an increasing number have come to accept this as an indelible part of Schumacher's character.
In moments of extreme pressure - and sometimes not even then - his first reaction is often to protect his position by unsporting means.
For a long time, his elevated status in the sport insulated him from the severest public criticism, which tended to come from the media and other outsiders, and was thus more easily shrugged off.
But in recent years the indulgence with which he is treated has evaporated, which explains why the gamesmanship he employed to stop qualifying in Monaco this year met with such a violent reaction from his fellow drivers.
Tolerance of what many now see as little better than cheating has been at an all-time low this season.
