"The last six months it's been really bad. I've been taking all sorts of tablets and trying all sorts of treatments but unfortunately the problem was not to go away," he said.
The 31-year-old Dane has a chronic Achilles tendon injury which will prevent him fullfilling the remaining year of his contract with Dutch side Ajax.
Laudrup said he had considered undergoing surgery but had been advised that it would not guarantee a solution to the problem.
Laudrup played 82 internationals for Denmark, scoring 21 goals and was a member of the side that won the European Championships in 1992 in Sweden.
Six championship medals
He started his club career with Brondby and then joined Bayern Munich in 1990 before two seasons in Italy with Fiorentina and AC Milan.
In 1994, he joined Rangers where he spent four years before joining Chelsea in the English Premiership, where he had a short, unhappy stint.
Laudrup scored 14 goals in this season's Dutch championship for Ajax but missed out on adding to the six league championship medals he had amassed during his career.
He told BBC Scotland he had had the injury since the World Cup in France in 1998, but that it had deteriorated progressively since then.
"The last six months it's been really bad. I've been taking all sorts of tablets and trying all sorts of treatments but unfortunately the problem was not to go away," he said.
"I've been thinking about an operation but specialists in Holland and Denmark couldn't give me any guarantees that the problem would be solved so I thought it was about time to call it a day."
He expressed his disappointment at having to end his career because of injury, but chose to dwell on more positive thoughts.
"You have to look over the 14 years you've had and it's been tremendous," he added.
"Now I just want to relax and get a little distance from football and then consider whether I want to go back into it or do something else completely different."
He described his time as a player in Scotland as at "the top of the list" in his football memories.
"That was the best time of my career as a player and as a person, and now I've got more time maybe to go and watch Rangers at Ibrox," he added.