Truth can reveal Nelsen rang his New Zealand coach Ricki Herbert at 1pm this afternoon to break the news.
Nelsen, who takes over as Toronto FC coach on Feb 1, will play his last game for Queens Park Rangers on Jan 29.
NZ Football has hoped Nelsen would continue to play for the All Whites until the team qualified for the 2014 World Cup.
But Nelsen has decided the task at Toronto is too big and he needs to focus fully on his first coaching role.
Nelsen retires after playing 49 times for his country.