Katich, 36, is currently playing with Hampshire in the English county season and is committed to play for the Perth Scorchers in the Champions League Twenty20 in October.
But he was axed from the Australian team after the 2010-2011 home Ashes series defeat to England and was stripped of the New South Wales captaincy last year in the Sheffield Shield competition.
Katich released a statement through Cricket Australia saying personal factors were the main reason for his retirement.
"With a young family and a desire for an extended time at home, Simon has decided it is time to reassess his priorities," the statement said.
Katich, a left-handed top-order batsman, played 56 Tests from 2001 to his last appearance against England in Adelaide in December 2010.
He scored 4,188 Test runs at an average of 45.03 with 10 centuries, and made 44 one-day international appearances for 1,324 runs at 35.78.
His demotion from the Test team was highly controversial and his tense relationship with Australian skipper Michael Clarke was played out heavily in the media.
Katich began his Sheffield Shield career with Western Australia but joined New South Wales in the 2002-03 season and went on to score a total of 8,807 runs for the two states in 104 matches at 55.39, with 26 centuries.
He was at his best during the 2007-2008 domestic season, not only captaining NSW to their 45th Sheffield Shield title but receiving the Player of the Year Award with a record-breaking 1,506 runs at an average of 94.12.
In the same season Katich became the first man since Sir Donald Bradman to score 300 at the Sydney Cricket Ground, making 306 off 461 balls against Queensland.
"Simon Katich retires from Australian first-class cricket as not only one of our great players, but also one of our most respected," Australian Cricketers' Association chief executive Paul Marsh said.
"His on-field achievements speak for themselves and as an ACA executive member, Simon's contribution to the players' collective cause has been outstanding."