Murphy was concussed by a high hit early in last year's grand final and hasn't played since, with the defender ruled out of match simulation training in February.
The Magpies said following careful consideration, with the advice of the AFL's medical concussion panel, the decision was made for Murphy to "medically retire" from football.
The 24-year-old informed his teammates of his decision on Tuesday morning.
He had suffered multiple concussions prior to starting, and during, his AFL career.
Lincoln McCarthy collides with Nathan Murphy during the 2023 AFL decider. (Joel Carrett/AAP PHOTOS)
Murphy is the second player this year to retire through a concussion suffered in last year's finals series, after Melbourne midfielder Angus Brayshaw called time in February.
"I feel it is the right time and the right decision for me to hang up my footy boots," Murphy said in a statement."I love my football, but my priority is on my future and ensuring I live a full and healthy life."I'd like to thank the club, coaches, teammates, staff and the Magpie Army for all their support throughout my playing career and for allowing me the opportunity to live out my childhood dream of playing AFL."It is not lost on me how fortunate I am to have been able to experience premiership success with this group and club.
"I hope I did the jumper proud and thank the many people and supporters who helped me along the way."
Murphy played 57 games, including 24 in his breakout campaign last season.
"On behalf of everyone at Collingwood, we thank Nathan for his contribution to our club and commend him on the maturity he has shown throughout this period," football boss Brendon Bolton said in a statement.
"While we will miss 'Murph', he'll forever be a part of Collingwood's history as a 2023 premiership player.
"On behalf of the entire club, we wish him all the best for this next chapter."
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