The 36-year-old re-joined Malaga for second spell after being released by Espanyol in January and has made 12 appearances in what will prove to be his final season in LaLiga.
Demichelis won 51 caps for Argentina, scoring twice, and announced his decision at a news conference on Monday.
"I want to be honest, I lost the strength in my legs and my concentration," he said. "But I want to give thanks to football.
"I speak from my heart when I say I thank you all for being here and showing me the appreciation – Malaga have shown faith in me and have given me the desire to play more up until this point.
"It was a dream to finish my career at Malaga, it is a club that has always had a special place in my heart and it is an honour to end my playing days here.
"Now I look forward to being a Malaguista forever and supporting the club from the stands."
A product of River Plate's youth system and a cultured defender, Demichelis twice won the Argentinian title before moving to Bayern Munich in 2003.
His time with the Bundesliga giants proved highly decorated as Bayern claimed four domestic doubles.
Despite initial injury problems in Germany he shone, first in a defensive midfield and then at the heart of defence, but had fallen down the pecking order by the time his old River boss Manuel Pellegrini brought him to Malaga in January 2011.
Pellegrini came calling once more when Demichelis moved to City from Atletico Madrid in 2013 – he never played a game for the capital club having joined them on a free transfer from Malaga earlier that close season.
Despite initially struggling to acclimatise to the pace of English football in his advancing years, Demichelis played a pivotal role in City's run to claim the Premier League title in the 2013-14 season.