Gago, 34, also played for AS Roma and Valencia and was on the books of Buenos Aires club Velez Sarsfield.
"We've lost a very important player," Velez coach Pablo Cavallero told a local radio station in announcing the news. "The decision has been made."
A stylish holding midfielder, Gago seriously damaged his Achilles tendon three times and twice damaged the tendons in his knee, robbing him of years at the top.
He won two La Liga titles with Real Madrid and appeared for Argentina at the 2014 World Cup and the 2008 Olympics.
