The 36-year-old helped his club to a record-breaking 19th league title this season, but his last appearance was in the UEFA Champions League final defeat to Barcelona.
Scholes will now remain at Old Trafford as a member of Sir Alex Ferguson's coaching staff from the beginning of next season.
But Ferguson was full of admiration for Scholes, as he told United's official website: "What more can I say about Paul Scholes that I haven't said before.
The Scot also went on to add; We are going to miss a truly unbelievable player. 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."
Scholes said: "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.
"This was not a decision that I have taken lightly but I feel now is the right time for me to stop playing.
"To have been part of the team that helped the Club reach that 19th title is a great privilege."
