Forlan, 40, last played for Kitchee in Hong Kong, with his final appearance coming in May last year.
The forward, who also played for the likes of Inter and Atletico Madrid during a fine career in Europe, confirmed his retirement on Tuesday.
"It hasn't been easy, I didn't want the time to come, but I knew it was going to come," Forlan told Telemundo.
"I have decided to stop playing football professionally."
Luego de 21 años tomé la decisión de poner fin a mi carrera como futbolista profesional. Se cierra una linda etapa llena de grandes recuerdos y emociones pero comenzará otra de nuevos desafíos.— Diego Forlan (@DiegoForlan7) August 7, 2019
¡Gracias a todos los que de una u otra manera me acompañaron en este camino! 👋🏼 🔟 pic.twitter.com/gVwX0RQJow
Forlan started his professional career with Independiente in Argentina before earning a £6.9million move to Manchester United in January 2002.
He won the Premier League with United in 2002-03 and the FA Cup the following season before joining Villarreal in 2004.
Forlan enjoyed a prolific spell in LaLiga, scoring 128 goals in 240 league games for Villarreal and Atletico Madrid, while also helping the latter clinch the Europa League in 2009-10.
After a brief spell at Inter, he played for Internacional, Cerezo Osaka, Penarol, Mumbai City and Kitchee before calling time on his career.
Forlan will also be remembered as one of Uruguay's greatest players, having scored 36 goals in 112 appearances for his nation, who won the Copa America in 2011, while he claimed the Golden Ball at the 2010 World Cup as his country finished fourth.
Luis Suarez, Forlan's former international team-mate, paid tribute to the forward.
"Historic for Uruguayan football. Grateful for all the unforgettable moments you made all Uruguayans live, both in the national team and in all the teams you played," the Barcelona star wrote on Twitter.
"I will always be grateful for what you taught me, both on and off the field, a dream to have played with one of my idols. You will always be a legend in Uruguay. A lot of success in your new challenges, friend."
tanto dentro como fuera de la cancha, un sueño haber jugado con uno de mis ÍDOLOS. Serás siempre una LEYENDA en Uruguay. MUCHO ÉXITO EN TUS NUEVOS DESAFÍOS, AMIGO 🔝🔝🔝🔝👏👏👏👏 @DiegoForlan7 #orgullouruguayo #leyendauruguaya #amigogoleador pic.twitter.com/1bkGGoKG62— Luis Suarez (@LuisSuarez9) August 7, 2019