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."
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