Sigurdsson damaged the cartilage in his left knee more than 12 months ago and when he returned to match action for the Baggies reserves in March this year he then ruptured ligaments in his right knee.
"I consider myself very fortunate to have been at a club like West Brom when these injuries came about," Sigurdsson told the clubs official website.
"Gary Megson was right behind me throughout and the club's physios, Nick Worth and Simon Spencer, have been absolutely great.
"The chairman has also been fantastic. In fact, the whole club has treated me brilliantly.
"I've been struggling with my injuries for almost a year and a half now and every time I reached a certain level my left knee just kept breaking down.
"I was then asked the questions 'how long do you want to carry on?' and 'how much do you want to risk permanent damage to your knee?'
"We all sat down and decided to give it one more go but the knee broke down again. So the decision to retire was really made for me.
"It's been very hard to accept. I'd never had a serious injury before I came to West Brom and I've been very unlucky.
"I'm very proud to have played a part in what has been going on at West Brom."