The 35-year-old had battled back to play for Munster this season but has now decided he can no longer go on.
"I feel lucky to have been involved in an era that has seen Munster and Ireland enjoy much success," said Wallace.
"It is disappointing that injury is forcing me to retire now, but I take great comfort in knowing I have had an unbelievably enjoyable career."
As well as winning 72 caps, scoring 12 tries and tasting Grand Slam glory with his country, Wallace featured in all three Tests on the 2009 Lions tour of South Africa.
He made seven Lions appearances three years ago having first represented Britain and Ireland's elite as a late call up back in 2001.
David followed brothers Richard and Paul in earning selection for the Lions after Richard toured New Zealand in 1993 and Paul played a key role in the historic 1997 series win over the Springboks.
Wallace won two Heineken Cups with Munster in 2006 and 2008 and tasted similar success in the Celtic League.
He played more than 200 times for the province but his career finished on a sour note as his last outing was the Heineken Cup quarter-final defeat to Ulster at Thomond Park.