The 32-year-old won 32 Scotland caps, scoring eight tries, in a nine-year Test career which included two Rugby World Cups.
Danielli joined Ulster at the start of the 2007/08 season from the now defunct Borders side and made 78 appearances for the Irish province, scoring 26 tries.
"Having been advised that I am no longer able to achieve the level of fitness required to play professional rugby, it is with great sadness that I announce my retirement from the game," Danielli said.
"This last year has been incredibly frustrating in that my back has not allowed me to train or play anywhere near a frequency or an intensity necessary in a professional game and because of the pain, deterioration and related injuries it's causing I have to think about later life beyond rugby.
"Having said that I feel privileged to have been playing for over a decade and have thoroughly enjoyed my time as a professional rugby player, particularly my last five years here at Ulster and the huge honour of representing my country."
Danielli's announcement comes ahead of Ulster's Heineken Cup final against Leinster on May 19.
After being educated at Oxford University, Danielli joined Bath and made his Scotland debut within two years, becoming renowned for his powerful running.
Scotland head coach Andy Robinson paid tribute, telling www.scottishrugby.org: "I first encountered Simon as a young winger at Bath more than 10 years ago and it speaks volumes for his dedication and determination that he frequently forced his way into international contention.
"At his peak Simon was always one of the fittest players whether for club or country and, at his best, was a proven try scorer and powerful runner, as we saw during last year's Rugby World Cup.
"I wish him well in his future and thank him for his service to Scottish rugby."
Gilbert has released a new line of rugby cleats. The Gilbert Virtuo 8S is part of the exciting new product. Check it out.
The entire All Blacks apparel line has been updated for 2013/14. Check out the New Zealand All Blacks polo.
The Nike Tiempo is a solid rugby cleat and one of few styles still made from full-grain natural leather.
The Gilbert Blitz 8S rugby cleat is a great cleat at a great price of $69.99. Get a new pair of cleats today.
A cool looking all black rugby cleat with the high performance adidas is known for. Get in the Gear!
Wear the crest of the British and Irish Lions on your t-shirt. A great look for the summer.
The All Blacks Performance t-shirt is black with hints of blue from the training jersey. Very Cool.
The New Zealand All Blacks training jersey for 2013/14. Get in the Gear!
The USA Rugby Pro Alternate rugby jersey is perfect for any fan of the Eagles. Get yours to wear during the summer Test matches.
The NEW All Blacks 2013/14 jersey has arrived at World Rugby Shop. Dare to wear the colors of the All Blacks.