The 34 year-old will continue to be available for his country in both One-Day Internationals and Twenty20 Internationals.
Alistair Nicholson said:
“Shane has had an enormous impact on the Australian Test team for more than a decade.
"Beyond the runs, wickets and catches, it’s been his determination and his desire to help support and improve his team mates that are amongst his most telling contributions.
“The lengths to which he was prepared to go in order to get on the field for many of his 59 Tests speak volumes for his drive to succeed and ability to overcome setbacks.
“There is no doubt that many players will continue to benefit from Shane’s presence in the ODI and T20 teams, along with all the current and former players he represents in his role as a member of the ACA Executive.
"His attributes as a Test player were strong, however, his personal qualities are even greater and I look forward to Shane continuing to provide great service to the game both on the field and off."
Yesterday Shane Watson said:
“I announce my retirement from Test cricket today with a heavy heart.
“Playing for my country has always been an absolute privilege, and there is no more challenging environment than Test cricket.
“I have given my all to be the best I can be, physically, technically and mentally, and while I have not always achieved the personal goals that I set myself in Test cricket, to have played over 50 Tests and to have captained my country is more than I ever dreamed of.
“On this tour I have seen how the next generation of young Australian cricketers are ready to take the game forward.
“I hope to continue to represent my country in both shorter formats of the game, and I believe that I still have a significant amount to contribute.
“Cricket has given me so many incredible things in my life and now it's time to focus more of my time to give back to the game I love so much. I am looking forward to helping to develop the next generation of cricketers at the youngest of ages who are the future of the game.”
Watson made his Test debut at the Sydney Cricket Ground in January 2005, against Pakistan, and made his final Test appearance recently at Cardiff.
In 59 Test matches he scored 3731 runs at 35.19, a tally that places him 25th in the list of all-time run-scorers for his country. That tally includes four hundreds and 24 fifties, while he also took 75 wickets at 33.68 and held 45 catches.