The Italian announced his decision at a press conference at the Vallelunga circuit - where he began his 20-year racing career - after an earlier tweet hinted at the news.
"It's very different today dawn for me .... nothing will be as before," read the tweet.
"I have not stopped for physical reasons, or because of the competitiveness of a bike - I gave up a contract with Aprilia which was identical this year's, with the same bike," he said at Vallelunga.
"I think it has cost me enough time with my children and my wife and now it is right to devote myself to them because time passes - you cannot stop it.
"I'm not like some politicians who grow attached to their place - it is only fair to give up my space to allow young people an opportunity."
Biaggi dramatically won this year's World Superbike Championship for Aprilia by half a point from Briton Tom Sykes, who rides for Kawasaki.
Biaggi, 41, also won the 2010 WSBK crown as well as four 250cc World Championships from 1994-97.
He finished as runner-up in the 1998 500cc championship to Mick Doohan and also came second in 2001 as Rossi won his first premier-class title. He was again runner-up to Rossi the following year, when that series became known as MotoGP.
In addition, he finished third in the top-class championship three times, taking 15 victories in all for Yamaha and Honda.
He claimed 21 race wins in WSBK after joining the series in 2007, finishing third in the standings in 2011.
Sylvain Guintoli could now be approached to replace Biaggi as Eugene Laverty's team-mate in 2013.