The 27-year-old, who joined Posh from Shrewsbury on a free transfer in May 2010, has been out of action since the 4-1 home win over Stockport in the FA Cup on November 16, 2010.
Hibbert, who also played for Port Vale, Preston, Rotherham and Bradford, told Peterborough's official website: "I've been left with no choice but to make the decision to announce my retirement from the professional game due to a knee injury.
"I'm truly devastated, but I can walk away knowing I couldn't have done any more. I would like to take this opportunity to thank the chairman Darragh MacAnthony, the manager Darren Ferguson, the staff and players at Peterborough United who have been fantastic to me.
"I have no doubt the club will continue to go from strength to strength. I'll never have a bad word to say about the football club and I wish them the very best in the future.
"Finally, I would like to thank the fans for their support during my time at London Road."
Peterborough boss Darren Ferguson added: "It is a very sad day that he has had to retire.
"Unfortunately he didn't get the chance to play for me, but he is a fantastic lad and a great professional.
"He is a good example to others. He could not have worked any harder to try and get back and I am sure he will go on to do good things in the future."