The leg-spin legend, who was Friday inducted into the International Cricket Council Hall of Fame at Lord's, was instrumental in lifting the profile of the domestic Twenty20 league in its first two seasons and was one of its biggest drawcards.
But the 43-year-old said his time was finally up.
"I think the time is right for me to hang up my Big Bash boots -- juggling business, family and commentary commitments across two continents is not easy," said Warne.
"I've always loved the game but now it's time to observe. I wish Cameron (White) and rest of the lads all the best."
White will retake the captaincy.
Melbourne Stars head coach Greg Shipperd believes his team and the league are indebted to Warne for what he has helped them achieve during the first two seasons.
"It was always a privilege to share a dressing room with Shane," Shipperd said.
"His unique and exceptional skills will remain a symbol of excellence for generations to come."
During his international career, Warne was the first bowler to take 700 Test wickets and represented Australia in 145 Tests between 1992 and 2007. In all, he took 708 Test wickets at an average of 25.41.
He also took 293 wickets in 194 one-day internationals at an average of 25.73.