The 33-year-old, who won the Premier League, FA Cup and League Cup with Chelsea before spells with Manchester City, West Ham and Sunderland, has missed over five months of the season with the problem.
The Reading left-back underwent surgery in November before returning on April 8 against Bournemouth but he made just one more appearance against Leicester before the end of the season.
Bridge, who was on loan at Brighton last term, made a total of 12 appearances for Reading this season after joining on a free transfer from Manchester City last summer.
"After an operation on my knee in november 2013, I've been struggling to train and play without constant pain," he said.
"I've been advised by my specialist that my knee needs medium to long-term rest. On this advice, and following discussions with close friends and family, I've made the reluctant decision to retire.
"Representing my country was my proudest moment. I've had a great career and I look forward to my next chapter."
In a statement made by Reading on Tuesday, manager Nigel Adkins said: "Wayne is a top player whose season was sadly hampered by injury but he's worked ever so hard.
"I would like to place on record my thanks to Wayne for his efforts and contribution to the cause."
Former club Man City tweeted: "All at MCFC wish Wayne Bridge the very best of luck following the announcement of his retirement from football."
And Southampton, where Bridge began his career as a youth, said on Twitter: "SaintsFC Academy graduate Wayne Bridge has just announced his retirement from professional football. All the best, Wayne!"
Bridge gained 33 caps for England between 2002 and 2009, attending two World Cups, before retiring in controversial circumstances in February 2010.
He made 173 appearances for Southampton, 142 for Chelsea and 58 for Man City.
Reading also announced on Tuesday that Jobi McAnuff, Mikele Leigertwood and Kaspars Gorkss will leave the club when their contracts expire this summer.