Murphy has not played since last season and has finally opted to make his announcement having decided to quit the game last month.
The Chester-born 36-year-old made 249 appearances for the Reds between 1997 and 2004, and played a major role in their treble-winning season of 2000/01 when they won the League Cup, FA Cup and UEFA Cup.
He made nine full England appearances and also played for Crewe Alexandra, Charlton Athletic, Tottenham Hotspur, Fulham and Blackburn Rovers during his career.
Murphy had his Blackburn contract terminated by mutual consent in the summer.
Murphy told the Liverpool club website: "There have been some press reports about whether I'm still playing or available but I decided a little while ago I would retire, I just didn't make it official.
"So now I'm officially retiring because I'm sick of having conversations about it and almost stringing people along. I decided three or four weeks ago I was done.
"This is me, 20 years, I'm done. I've had a wonderful career and can look back on it with fondness."