The Dutch midfielder, who is in his second season at Brazilian club Botafogo, was the leading candidate to replace Massimiliano Allegri, who was sacked on Monday.
"Considering my relationship with the (Milan) president (Silvio Berlusconi), when he called me yesterday I couldn't say no after 10 years spent there (at Milan)," he said in a press conference on Tuesday at Botafogo's headquarters in Rio de Janeiro
Seedorf joined Botafogo in 2012 after a 10-year career at the San Siro.
The 37-year-old is the only player to have won the Champions League four times with three different clubs - Ajax (1995), Real Madrid (1998) and AC Milan (2003 and 2007).
"I am retiring from football after 22 years," he said. "It has been a difficult night but I am satisfied by what I've achieved in my career and what I've done at Botafogo.
"My aim is to dream again.
"This experience at Botafogo has helped me grow a lot and will no doubt help me in my next step as coach of AC Milan.
"I wish Botafogo and my team-mates the best.
"The level has increased thanks to everyone and I'm certain that the club will be able to remain at a high level."
Seedorf returns to Italy and inherits a team that is 30 points behind league leaders Juventus at the halfway stage of the campaign after Sunday's 4-3 defeat at Sassuolo.
That result brought to an end Allegri's three-and-a-half-year spell at the helm of the Rossoneri.
Seedorf could make his coaching debut on Sunday evening at home to Hellas Verona.