"This is the hardest decision of my career," Hitzfeld told reporters, underlining that he would turn 65 in January and it was time to wrap up his three-decade coaching career.
Former Borussia Dortmund and Bayern Munich boss Hitzfeld, at Switzerland's helm since 2008, has just steered the "Nati" to their third successive World Cup.
Unbeaten in the qualifying race, they jumped seven notches to seventh in the FIFA rankings and are among the top seeds for December's finals draw.
They secured their berth in Brazil in their penultimate qualifier, beating Albania away last week, and capped it with a home win against Slovenia.
"Under Ottmar Hitzfeld, Switzerland for the first time reached a World Cup before their final qualifier. And with him in charge, we've pulled off the historic exploit of getting into the first pot for the draw and becoming a top seed," said Peter Gillieron, head of the Swiss Football Federation.
"We understand the reasons for his choice. As much as we regret this decision, we must accept it and respect it," he added.
Hitzfeld hails from Lörrach, a German town just over the border from the Swiss city of Basel.
After a playing career mostly in Switzerland -- starting with local giants FC Basel -- he shifted to management in the 1980s.
Having coached Swiss clubs including Zurich's Grasshoppers, he took over at Dortmund in 1991, then Bayern in 1997.
They axed him in 2004 but brought him back in 2007.
Hitzfeld said it was crucial to know when to bow out, and that he had been pondering it since the World Cup qualifiers began.
"You have to be in full command of your capacities," the coach said.
"I've already known what it was like to get 'burned', with Bayern in 2004 — I don't want to relive that," he said.
"Anyway, I'm going to keep working as a pundit.
"That way I'll always be right," he added, laughing.
The Swiss Football Federation tapped Hitzfeld to succeed iconic local name Köbi Kuhn, in charge from 2001.
Kuhn, who steered his team to Euro 2004 and the 2006 World Cup, had already decided to step down after Euro 2008 on home turf.
Hitzfeld took Switzerland to the 2010 World Cup, but his star fell sharply after they failed to qualify for Euro 2012.
But the German is now lauded for developing a new generation of talent, often with roots in Switzerland's Balkan migrant community.
Most emblematic is 22-year-old winger Xherdan Shaqiri, who like Hitzfeld started at FC Basel. He joined Bayern in 2012.
That has paid off: Switzerland's seven wins and three draws in the World Cup qualifier are part of a 14-match unbeaten run that also saw them beat Brazil 1-0 in a friendly in August.
Another highlight has been a 5-3 win over his native Germany in Basel in May 2012.
On the eve of Thursday's announcement, Hitzfeld said his goal in Brazil was to clear their group.
That would erase memories of 2010 in South Africa, where they exited in the group stage, despite beating eventual champions Spain 1-0 in their opener.
Under Kuhn in Germany in 2006, they finished top of their group, ahead of eventual finalists France, but went out on penalties by Ukraine in the next round.
Hitzfeld said he did not fear that news of his retirement would hit morale in Brazil.
"In December 2007 I told Bayern I was going to go. We went on to win the double in May 2008," he said.