The 37 year old, who remains the only Swedish player to twice win the Stanley Cup, Olympic gold and World Championship gold, had recently signed a one million dollar contract to play for the Avalanche until the end of the season.
However the problems with his right foot which have affected him for several seasons proved insurmountable.
At an emotional press conference on Monday, Forsberg said that he was sure that the decision to retire was the right one for his body.
"The time has finally come. I am here today to announce that I am to retire from the game of ice hockey. I tried, I really tried and I tried and I tried - I'm really sure about my decision this time. When I got to the second game it became more evident that it was not going to work out - I decided that I could not put my health at risk anymore."
In tribute, the Avalanche will retire Forsberg's shirt number 21.
During his illustrious career which began with his home club Modo in Sweden, Forsberg broke numerous records and won numerous awards and remains fourth in the NHL list of assists per game (0.90)
His list of honours during a thirteen year playing career in the NHL also included the prestigious individual Hart Memorial Trophy in 2003 for the NHL's Most Valuable Player.
In an online poll run by the sports department of Swedish public service radio, 87 percent of people voted Forsberg as Sweden's greatest ever hockey player.