Martyn played 273 games for the Whites following his £2.25m move, then a domestic transfer record for a keeper, from Crystal Palace in January 1996.
The 39-year-old, who had been set to agree a new deal at Everton, has not played since January due to a stress fracture.
Martyn, whose contract was due to expire this month, underwent a scan yesterday and would have been offered a new deal if it proved positive.
Specialists, however, have recommended surgery to pin the bone and Martyn has therefore decided to call time on his career.
Martyn joined Everton from Leeds in September 2003 and he was named the Whites best all-time keeper in a recent poll.