The 35-year-old fly-half won a record 104 caps during an illustrious career with Wales. He twice toured with the Lions and was a Test starter on the 2009 series with South Africa.
On the domestic stage, Jones enjoyed two spells with the Scarlets, either side of a stint with Clermont Auvergne, before joining Wasps.
He has made 11 appearances for the Aviva Premiership outfit this season but will move into fellow Welshman Dai Young's back room staff at the campaign.
"I feel the time is right for me now to make the transition into coaching, which is what I have always wanted to do.," Jones added.
"There is an opportunity for me to do that at London Wasps and I am very excited about the next step of my career."
Jones made his Test debut as a replacement in Wales' record 96-13 humiliation at the hands of South Africa in Pretoria in June 1998.
But Jones went on to captain his country and was a member of Wales' Grand Slam winning sides of 2005 and 2008 and played in four World Cups.
He surpassed Gareth Thomas' 100 cap record in 2011 and won his 104th and final cap in the World Cup third-place play-off against Australia.
He is Wales' second highest points scorer, behind Neil Jenkins, with 917 points. Jones also scored 53 points for the Lions over six Tests on the 2005 and 2009 tours.
Fellow Scarlets, Wales and Lions great Phil Bennett has paid tribute to Jones and reckons he will become an equally effective coach.
"It is great to see that Stephen has being given a coaching role with Wasps," Bennett told the South Wales Evening Post.
"Hopefully, he can get some valuable experience coaching in the Premiership under Dai Young and then maybe he can come back to Wales one day.
"He has spoken about the Scarlets being the club dear to his heart, it would be fantastic to see him back here in a coaching capacity.
"Stephen has been a wonderful role model for younger players and the one thing that has stood out throughout his career is his attitude.
"I was speaking to some of the Wasps coaching team at the start of the season when I was a guest for a game at Bath and they couldn't speak highly enough about his professionalism.
"I remember Stephen when he first came through at Stradey. Frano Botica was fly-half at the time and was doing some kicking practice after training. Who was out there with him? Stephen Jones.
"He has worked incredibly hard at his game throughout the career and has been up against some class fly-halves for Wales over the years.
"It is testament to his ability and work ethic that he still managed to win more than a century of caps and played in six Tests for the Lions. He deserves all the accolades and plaudits he gets and I wish him all the best in his new role."