Bryan Hamilton, the Northern Ireland manager, was set to name the 36-year-old defender in his squad for next week's European Championship qualifier against Portugal - even though he has not found a new club since being released by Chelsea at the end of last season.
However, Donaghy, Northern Ireland's most-capped outfield player, told Hamilton he has decided to retire from international football.
Hamilton said: 'He told me he believed the time was right for him to step down as a Northern Ireland player. Captaining his country against World Cup finalists Colombia and Mexico in his last two games was a fitting note to go out on, he believed. We'll all miss him. He was an exceptionally good player for us for 14 years.'
Paying tribute to Donaghy, second only on the Northern Ireland all-time caps list to goalkeeper Pat Jennings (119), the Irish FA secretary, David Bowen, said: 'This is a sad day. Mal has given us such distinguished service over the years.'
Alan McDonald, the Queen's Park Rangers defender who is back in the squad after injury, is set to resume as captain against the Portuguese.Reuse content