Hinshelwood, 28, has been plagued by a long-standing back problem.
Two months ago, the condition led him to announce he was taking a break from international rugby but, after further medical advice, he has now called time on his career completely.
Worcester centre Hinshelwood won 19 caps for Scotland, making his debut against Canada in 2002 and a final Test appearance off the bench during last season's RBS 6 Nations appointment with Italy.
He featured in four of Scotland's games during the 2003 World Cup campaign, including the quarter-final defeat against Australia, while on the domestic scene, he was Worcester club captain during their first season of Premiership rugby last term.
"This is very sad news for everyone connected with the club," said Worcester rugby director John Brain.
"Ben has been a key contributor to what we have achieved so far at Worcester, and I would like to place on record my thanks for everything he has done for us, both on and off the pitch.
"However, we fully respect and support his decision, as his long-term health has to be his primary concern.
"We all wish him every success for the future."
Scotland coach Frank Hadden said: "I'm very sorry to hear about Ben's retirement.
"We had hoped he would have been competing very strongly for a place in our 2007 Rugby World Cup squad and our thoughts go out to him at this difficult time.
"We'd like to thank Ben for his contribution to the game here and for carrying on a fine tradition by following in his father Sandy's footsteps to play for his country.
"We hope he has many fond memories of playing for Scotland and we wish him all the very best for his future."
Hinshelwood is the latest player to be forced out of competitive rugby this year due to injury, a list that includes England trio Trevor Woodman, Phil Greening and Alex Sanderson.