He said: "I've spent a while making up my mind, thinking about things. Deciding whether I wanted to go ahead with an operation and see if I could come back or whether I should retire.
"It would have been a big and difficult operation. At this point, I think it's better for my health and future life to say 'that's it'."
Manager Martin O'Neill praised the leadership qualities that persuaded him to make Laursen skipper at the beginning of this campaign.
"We've missed his defensive qualities, we've missed his goals at the other end, but mainly we've missed his influence in the team," he told BBC Radio Five Live.
"Over the last couple of seasons the influence he has exerted has really been terrific."
Laursen made his last appearance for Villa against local rivals West Brom
It had been hoped that as Laursen's most recent injury was to his right knee, which has been problem-free through his career, he would recover to play again this season.
But after aggravating the joint during Villa's win over West Brom in January, he underwent surgery and then suffered a further reaction during a training trip to Dubai in April.
Despite signing from the Italian club in 2004, the majority of his appearances came in the last two seasons as he seemed to overcome the complaints that blighted the start of his Villa Park career.
He was an ever-present in the Villa line-up last term, winning the fans' player-of-the-season award, and in his absence they have slumped from third to a distant fifth in the top flight this season.
O'Neill's own playing days were ended by a similar injury and he has sympathy for the difficult decision Laursen faced.
"It's soul-searching, it's heart-wrenching. Even when you reach the ripe old age of 30, 31 you still always think you are going to play. In your mind you are still 19, but then suddenly it is all taken away from you," he said.
"It is hard to come to terms with, certainly immediately. It took me about eight years."
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