He said: "It is with great sadness that I have had to hang up my boots on medical grounds.
"I have been desperate to play this season and do my bit in helping Leicester to return to the Premiership.
"But unfortunately I've been advised my knee will not stand up to playing professional football and I've reluctantly had to listen to their advice.
"I plan to take a bit of time off and then undertake my coaching badges."
Elliott, who earned 18 caps for Scotland, arrived at Glanford Park from Torquay in 1992 as United pushed for promotion from the old Division Four.
The move was made permanent in that summer, with United paying £50,000, before joining Oxford in November 1993 for £150,000. At United, he played 77 games, scoring eight times.
From Oxford he moved on to Leicester in 1997, with then Foxes boss Martin O'Neill paying £1.6million for his services.
He captained them to League Cup success, and caught the eye of Scotland boss Craig Brown. Despite being born in Epsom, he was eligible through family connections.
Elliott made 719 career appearances in all competitions, scoring 85 times.
Last March he was caught up in Leicester's controversial training visit to the La Manga resort in Spain.
He was one of nine players arrested after allegations of sexual assault made by three German 'tourists', who were later exposed as prostitutes.
But charges of failing to assist the women, as well as breaking and entering, were quickly dropped when the claims were discredited.