Australia great Warne, 38, who had one year remaining on his Hampshire contract, and had been due to captain them again this season, said business commitments as well as a desire to see more of his young children had prompted his decision to end an eight-year association with the English county.
Warne, second in the list of Test cricket's all-time leading wicket-takers, will now retire from all first-class cricket following his involvement as captain and coach of the Jaipur franchise in the new Indian Premier League.
Dimitri Mascarenhas will now captain Hampshire this season.
"My eight years involved with Hampshire have been a wonderful experience. Memories that will last with me forever and likewise the friendships that have been formed at the club," Warne said.
"Unfortunately I am retiring from all first-class cricket but will participate in the IPL with the Jaipur franchise as captain and coach.
"This was not an easy decision to make but due to some exciting business opportunities and wanting to spend more time with my children, I had to make this call," Warne, Hampshire's captain since 2004, added.
"I was very lucky to have played with such a wonderful group of guys, thanks for the great times - thank you very much for your support and friendship.
"To all the fans that have turned up to watch Hampshire play, thank you very much for embracing me as one of you, and supporting me and the team, it meant a lot to me," Warne, named as one of Wisden's five cricketers of the 20th century in 2000, added.
Warne took 276 first-class wickets for Hampshire at an average of 25.59 with best match figures of seven for 99 against Middlesex at the Rose Bowl.
He also scored 2,040 runs with a best of 107 against Kent at Canterbury in 2005.
More than that, however, he sparked Hampshire's on-field fortunes with his bold and inspiring captaincy and so helped the team become one of English cricket's leading counties.
Hampshire chairman Rod Bransgrove said: "Hampshire Cricket has been hugely privileged to have enjoyed the unstinting loyalty of this living legend since 2000.
"The most effective and entertaining bowler of all time, Shane Warne was also a brilliant leader and strategist.
"I know this will be a major disappointment to many fans of both Hampshire and Shane but it has become clear to both of us, that Shane can no longer make the commitment required to continue to lead Hampshire.
"Warnie will be sorely missed, never forgotten."
All-rounder Mascarenhas, the only England player to be so far signed up by the IPL, where he is due to play alongside Warne and Hampshire's Australia all-rounder Shane Watson, will not be available for county duty when the season starts next month.
Wicket-keeper Nic Pothas is in line to captain the side in Mascarenhas's absence provided he has returned in time from the rebel Indian Cricket League.
"I hope to bring great success to the club and Hampshire supporters," Mascarenhas said.
"It is a huge honour to be made captain of such a prestigious club, following in the footsteps of the likes of Colin Ingleby-Mackenzie, Mark Nicholas and the great Shane Warne."
Credited with singlehandedly reviving interest in leg-spin bowling, Warne finished his Test career at the end of last year's Ashes series in Australia with 708 wickets at an average of just over 25 apiece from 145 matches.
His record, however, has been surpassed by Sri Lanka's extraordinary off-spinner Muttiah Muralitharan.