The 32-year-old, who is based in Southampton, also won gold at the Commonwealth Games in 2002 and silver four years later in Melbourne.
"I would like to announce my retirement from diving, and say a massive thanks to everyone who supported me in my very successful career," he tweeted.
Olympic diving: Tom Daley and Pete Waterfield finish fourth
Waterfield won silver in Athens along with diving partner Leon Taylor but came fourth in London with Daley.
His medal was Britain's first in Olympic diving since Brian Phelps in 1960.
"It's the right time," Waterfield told BBC Radio Solent.
"I've got an ongoing shoulder injury that needs surgery. My body is struggling, I find it harder in the pool and when you are doing that you are not improving. Injuries, age and motivation are all factors.
"I always wanted to look back on a high and what greater high than the Olympic Games."
London-born Waterfield narrowly missed out on adding another Olympic medal to his haul in London last year when he and Daley finished fourth in the 10m synchro.
WATERFIELD'S MAJOR COMPETITION HIGHLIGHTS
2000 Olympic Games
Fourth in synchro 10m platform with Leon Taylor
2002 Commonwealth Games
GOLD in 10m platform
2004 Olympic Games
SILVER in synchro 10m platform with Leon Taylor
2006 Commonwealth Games
SILVER in 10m platform
2012 Olympic Games
Fourth in synchro 10m platform with Tom Daley
He has failed to make a competitive appearance since London as he has struggled with injuries, and created a stir earlier this year when he claimed his family could be left "homeless" after a decision to cut his funding.
The father of two was subsequently handed a new six-month deal which was due to be reviewed next month after the World Championships in Barcelona.
But his recent inactivity has meant Waterfield will not compete in Spain and has prompted his retirement decision.
"I always said that I would continue diving for as long as my body allowed me to and I'm so grateful to have had so many amazing years in the sport, doing what I love, but the time has come to hang up my trunks," he added in a statement issued by British Swimming.
"As much as I tried to prepare myself for the upcoming World Championships, I wasn't able to and that told me that it was time to reconsider my next steps. I'm so proud of everything I've achieved in my career and couldn't ask for anything more.
"Stepping away from the sport will allow me to spend more time with my wife and my two boys, who I had to leave on so many occasions throughout the years for training camps and competitions, so that's something I'm really looking forward to."
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