The Harlequins lock, who skippered the Wallabies at the 2011 Rugby World Cup, is to bring an end to a distinguished career that also saw him star for the Reds in Super Rugby.
Horwill earned 62 caps for his country and led the Reds to the 2011 Super Rugby title. He joined Harlequins in 2015.
The 33-year-old does not believe he is still cut out for Premiership rugby and announced his decision.
"I have given this great game everything I have," he said in a club statement. "I feel I can no longer give what is needed to play at this elite level.
"Rugby has been a big part of my life for many years; never in my wildest dreams would I have envisaged the incredible journey it has taken me on."
He said: "Winning the Super Rugby title at the Queensland Reds and being asked to captain my country are just some of the moments I will look back and cherish for a lifetime."
Harlequins head of rugby Paul Gustard said: "James is a true warrior of our great game; the ultimate professional and someone you always want on your side.
"It's been an honour and a pleasure to work alongside him at Harlequins. His resilience and character have made him the role model he is today and will continue to be long after his retirement."