Penney, regarded as one of the best fielders in English cricket, has been appointed as Assistant Coach to the Sri Lankan team on a contract that runs up until the World Cup in the West Indies.
The 37-year-old will work closely with newly-appointed Head Coach Tom Moody, a former Warwickshire batsman himself and a former coach of county rivals Worcestershire.
Zimbabwe-born Penney said the opportunity of working with the Sri Lankans was too good to miss.
"I have spent half my life with Warwickshire, and I have enjoyed a wonderful and highly successful career with the Bears, winning trophies and medals along the way, so retiring from all of this was not something I could consider lightly," he said.
"But when an opportunity came along to start a new career in coaching, and at international level, I simply couldnt turn it down. I would like to take this opportunity to thanks everybody involved at Warwickshire CCC for their support and encouragement throughout my entire career."
Dennis Amiss, Warwickshires Chief Executive paid tribute to Penney's contribution to the county.
"He has been a great servant to the club, a brilliant stroke maker and one of the best fielders I have ever seen, so he will be difficult to replace, but we fully understand and support his decision to pursue this new challenge with Sri Lankan cricket."
Penney was one of the substitute fielders controversially used by England in the recent Ashes Tests against Australia and had been due to spend the winter as a specialist fielding coach at the National Academy at Loughborough.
The England and Wales Cricket Board have agreed to release Penney from his commitment to enable him to take up the Sri Lanka job.