Hibbert, who joined the club from Shrewsbury in May 2010, sustained the injury six months later and has been sidelined ever since.
"I've been left with no choice but to make the decision to announce my retirement from the professional game due to a knee injury," he told the club's official website.
"I'm truly devastated, but I can walk away knowing I couldn't of done anymore to get back."
Manager Darren Ferguson added: 'It is a very sad day that he has had to retire. Unfortunately he didn't get the chance to play for me, but he is a fantastic lad and a great professional."
Meanwhile teenage striker Shaquille McDonald has penned a four-year contract with Peterborough after an impressive start to his career with the club.
The 17-year-old has scored in all but one of his games for Posh's Under-18 side since joining from Chasetown, bagging 11 goals in his last three outings.
Ferguson told the club's official website: "Shaq has done very well, he has progressed so quickly in the last three months. He has trained with the first team and done very well and we are delighted to award him with a new contract."
- Sports & Recreation