Pacquiao's bid for a fourth victory over Mexican Juan Manuel Marquez was ended in brutal fashion in Las Vegas at the weekend, prompting immediate calls for his retirement.
Freddie Roach, Pacquiao's trainer, said a fifth fight against Marquez was equally possible, but former world champion Hatton has laid his hat in the former camp.
"The only advice I could give Manny Pacquiao is that his legacy is already secured," said former world champion Hatton, who was himself knocked out by Pacquiao in 2009 in what was just his second career defeat.
"The thing is with us fighters is that there is always one more fight," added Hatton, who retired for a second time after an unsuccessful return to the ring in November against Vyacheslav Senchenko in Manchester.
"What's he (Pacquiao) going to achieve by having one more fight? Probably nothing. He's an eight-weight world champion. There's nothing more to be said.
"You'd like to see him go into retirement and spend some time with his family and be happy. He can't do any more from a boxing point of view."
Pacquiao, who will be 34 next week, was knocked unconscious by his great rival Marquez on Saturday - his second loss on the bounce - prompting both his wife and his mother to make appeals for him to call it quits.