Russell, 40, a one-club man in a career of more than 20 years with Gloucestershire, has had fitness problems for over a year and many expected him to retire at the end of this season.
In a statement, Gloucestershire said: "Jack has worked extremely hard to overcome his back injury but recovery is just not to be and unfortunately both he and the club have to accept that he has to call it a day.
"We owe him a massive thank you for his outstanding contribution, his commitment which is second to none. and the tremendous impact he has made to cricket, both for Gloucestershire and for England.
"Life will not be the same without him and he will be greatly missed."
Russell said: "I've had a magical time, thanks to all the players, coaches and fans who have supported me over the last 20 of years. It has been an honour and a privilege to have worn the Gloucestershire badge.
"My heart will always be with the team and this wonderful game of ours. I would like to wish everyone at the club continued success for many years to come."
Russell, who made his Gloucestershire debut in 1981 as a 17-year-old, became one of English cricket's most recognisable figures in his trademark battered old sun-hat.
He was also widely acknowleged a fine wicketkeeper, playing 54 Tests for England between 1988-98 with 153 catches and 12 stumpings.
Russell also scored 1,897 Test runs at an average of 27.10 including two hundreds but had the misfortune to appear in a generally weak England side.
That meant he was often dropped in favour of Alec Stewart as the selectors tried to cram an extra batsman into their fragile top order.
Even so, on the 1995-96 tour of South Africa he broke England predecessor Bob Taylor's record for most catches in a Test match with 11 dismissals at Johannesburg.
It was in the same match that Russell, born Robert Charles but known to everyone as Jack after the dog breed, batted for five hours to help Michael Atherton save the match.
But with selectorial whim rather than his own form dictating his inclusion, Russell eventually called time on his England career in 1998.
When he left the international arena Godfrey Evans, England's outstanding keeper of the 1940s and 50s, said of Russell's frequent omissions from the national team: "There was a terrible irony about all this: We were the worst Test team in the world and our one player of undeniable world class couldn't get into the side."
However, Russell continued to play with distinction for Gloucestershire. His attacking wicketkeeping, which saw him stand up to the stumps even to sharp seamers, helped Gloucestershire win six One-day trophies in five seasons between 1999-2003.
Many keepers followed his lead, the aim to put pressure on a batsman and stop him advancing down the wicket.
But few were as good as Russell, who in 465 first-class matches scored 16,861 runs at an average of 30.93 and took 1,192 catches and 128 stumpings.
Before retirement Russell, famously secretive about his address and known for an unconventional diet which at at times appeared mainly to consist of tea and baked beans, established a lucrative sideline as an artist and opened his own gallery.