Rees, 27, suffered the injury during a pre-season game last summer has been medically advised to stop playing immediately.
Rees said: "I'm gutted that I have been forced to retire at a time when I feel I could have contributed so much more to my club.
"Whilst I will always think what might have been, I will also look back on my career and what I achieved with a great deal of pride. Over the last nine years I have been privileged to take part in my hobby for a living, and I am extremely grateful for that opportunity.
"I would especially like to thank everyone at London Wasps, they have given me such tremendous support at all times through my career but particularly of late, and I am sorry that I won't get to repay them for that. Finally, I would like to thank my friends and family for their constant support through everything I have done."
Wasps' director of rugby Dai Young hailed Rees' commitment and attitude.
"This is incredibly sad news for Tom and for everyone at the club," Young said. "His attitude and commitment to the club remained hugely constant even when he was out injured and I know his presence will be missed around the squad."
Rees won 15 caps for England, and head coach Stuart Lancaster also paid tribute, saying: "We all recognise Tom's qualities as a player and a person and it's going to be a shame that he will never be able to display his talent on the world stage again.
"However, he has tremendous attributes as an individual and a leader. I am sure he will go on to become very successful in his future career and all the players and management here in the England camp wish him well on that journey."
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