The 26-year-old Australian, who has won 35 MotoGP races and leads the current standings by a point after winning two of the season's three events, made his announcement at a news conference ahead of Sunday's French Grand Prix.
"After a long period of thought and numerous discussions with my wife and family, I have decided to stop competing at the end of the season," said the Honda star.
"After so many years taking part in this sport that I love, and with all the sacrifices that I have had to make, I no longer have the passion to continue and I think that it is best to stop. I will go forward in different things in my life.
"This sport has changed a lot and it has changed to the point where I am not enjoying it."
He added: "There are a lot of things that have disappointed me, and also a lot of things I have loved about this sport, but unfortunately the balance has gone in the wrong direction. And so, basically, we won't be continuing any more.
"It would be nice if I could say I would stay one more year, but then where does it stop? So we decided to finish everything as we are now."
Stoner, who also won the world title in 2007 with Ducati, became a father for the first time in February when his wife Adrianna gave birth to a baby daughter.
But at the time he shrugged off suggestions that fatherhood would dampen his love of motorcycling.
"They say you slow down when you get married, but in my first year of marriage I won the title," said Stoner on the eve of the season.
"When I found out we were having a baby, I won it a second time. I don't think that's the case (that you slow down)."
Despite his blistering start to the season, Stoner has been critical of a series of technical changes to the sport that he claimed were undermining the championship.
This year's MotoGP bikes are 1000cc as opposed to the 800cc of old, while manufacturers such as Kawasaki and Suzuki no longer field factory teams, leaving just Honda, Ducati and Yamaha with official squads.
He has also been battling cramps in his arms that prove particularly painful under braking. Those problems came to the fore in the season-opener in Qatar, where he finished third before going on to secure wins in Spain and Portugal.
Stoner joined the elite MotoGP class in 2006 with a satellite Honda team after working his way through the 125cc and 250cc ranks following his debut as a 125cc wildcard at Donington in 2001.
His switch to Ducati in 2007 proved an inspired decision as he won the MotoGP season-opener in Qatar, followed by nine more victories that propelled him to the world title.
He moved to the factory Honda team last year and clinched his second title on home ground at Phillip Island, having already won nine races. Stoner closed the season with a 10th victory in Valencia.
Nine-time world champion Valentino Rossi, one of Stoner's great rivals, said he was shocked by the Australian's decision.
"It's a huge surprise to me as it is for everyone else," said the Italian. "It's bad news for the world of MotoGP.
"At the end of the season, we are going to lose a great rider and a great rival, but it's his decision."