The 40-year-old, who played 112 times for Uruguay, also played for Villarreal and Inter Milan, last played for Kitchee in Hong Kong in 2018.
He won the Premier League in 2003 with United and the Europa League while at Spanish side Atletico in 2009.
“It hasn’t been easy, I didn’t want the time to come, but I knew it was going to come,” Forlan said.
Forlan’s former Uruguay team-mate Luis Suarez posted a tribute to him on social media.
“Historic for Uruguayan football. Grateful for all the unforgettable moments you made all Uruguayans live, both in the national team and in all the teams you played,” said the Barcelona forward.
“I will always be grateful for what you taught me, both on and off the field. A dream to have played with one of my idols. You will always be a legend in Uruguay.”
Forlan’s memorable moments
Forlan ensured his name would be etched into the memory of Manchester United fans in December 2002 when he scored twice against Liverpool at Anfield.
He netted in the 64th and 67th minutes – the first courtesy of a howler by home keeper Jerzy Dudek – to secure a 2-1 win over United’s Premier League rivals.
Forlan may well be best remembered for celebrating – rather than scoring – a goal for United.
Coming on as a 79th-minute substitute, the then 23-year-old smashed in a brilliant shot to seal victory over Southampton in November 2002.
He ripped off his shirt in celebration – but was unable to put it back on before the game restarted and played on topless, even making a tackle
A Uruguay great
With Uruguay, Forlan was a Copa America champion in 2011, while he also won the Golden Ball – awarded to the tournament’s best player – at the 2010 World Cup as they finished fourth.
He is Uruguay’s third-highest goalscorer – netting 36 times in 112 caps – behind Suarez and Paris St-Germain’s Edinson Cavani.
He retired from international football in 2015.