Thompson had been experiencing numbness and dizziness since hitting a scrum machine in training with Wasps on October 26 and will have an operation on Tuesday.
The 33-year-old briefly retired in 2007 after undergoing surgery on a different neck problem - but this time he has been told there is no way he can return to the sport.
"I went to the specialist and he advised me it isn't safe to carry on playing," Thompson said.
The injury occurred two days before Thompson made his debut for Wasps, a club he joined on a three-year contract from Leeds in the summer.
Thompson played for an hour in his new side's 14-12 win at Worcester - but that was to prove the final match of a career which brought him 73 England caps, three appearances for the British and Irish Lions and a 2003 World Cup-winners' medal.
"I was gutted. I hit a scrum machine and it just went. I played 60 minutes at Worcester and that was it. I tried to convince myself it was fine and it wasn't," Thompson added.
"I went to the specialist and he advised me it isn't safe to carry on playing. I need another operation, which will happen on Tuesday. I have had a lot of numbness and dizziness.
"I was enjoying rugby. I thought I had done alright at the World Cup, compared to how some of the lads went, and I was really looking forward to Wasps. Dai Young is someone I really wanted to play for."
Thompson sent back an insurance payout of around £500,000 when he returned to action after his last neck injury, having received a second medical opinion that cleared him to play again.
The former Northampton, Brive and Leeds hooker forced his way back into the England set-up for the 2009 summer Tests against Argentina and emerged as the first-choice at the position for this year's World Cup.
But a career of glittering highs ended with the double blow of a quarter-final exit from the World Cup and then a second neck injury.
"I have got to accept it this time. There is no way I can play. I can't do what I need to do to earn a living. I scrum, that is what I do," he said.
"The World Cup was hard. To finish the way it did was really disappointing and then to suffer another blow a few weeks afterwards - it is like a kick in the nuts.
"This operation will be more painful than the last one. I will take a break and see what opportunities come along the way."
Dylan Hartley and Lee Mears were England's other hooking options at the World Cup, while Leicester veteran George Chuter was in the pre-tournament training camp.
Thompson tipped his now-former Wasps team-mate Rob Webber to break into the England squad.
"Rob Webber can definitely step up. Everyone said Webbs was a poor thrower, he wasn't. Wasps just had a poor lineout," Thompson said.
"Having (lock) Marco Wentzel has changed Wasps lineout around. Now they are up near the top of the stats."
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