Perry made his debut for the west country club in 1995, but has not played since facing Harlequins in the Guinness Premiership last December.
He holds the record for England caps won by a full-back, 36, and was part of the British Lions tour to Australia in 2001.
Perry said: "I can only operate at about 75 per cent and these days you have to be 100 per cent or you have got no chance.
"The bulging disc won't let me operate at 100 per cent - it affects the nerves, which then affect the muscles down my left leg especially, from the hamstring to the calf."
Perry will now take up a role with a consultancy firm near Bath, and his contribution over the last 12 years has been hailed by former club and international head coach Jack Rowell.
"Matt Perry was a gifted footballer with the underlying character which has allowed him to deliver successfully both on the club and international field," Rowell said.
"He was utterly reliable and therefore a good team player both on and off the field."