Mr. Kyl, who has been Senate minority whip since 2008, has never lost an election and was the front-runner in early polling for the race, easily topping a field of potential Democratic opponents, including Homeland Security Secretary Janet Napolitano, a former governor.
Mr. Kyl, 68, a leading voice in his party on national security and immigration matters, is the fifth senator and the second Republican to announce retirement ahead of the 2012 elections.
The senator, who served four terms in the U.S. House before winning the Senate seat in 1994, is expected to return home to Phoenix.
He and his wife, Caryll, have two children and seven grandchildren.
As news of his announcement spread, speculation ramped up about possible contenders for the open seat, with possible candidates including Ms. Napolitano, Republican Rep. Jeff Flake and even injured Democratic Rep. Gabrielle Giffords, who is said to be making rapid progress in recovering from an assassination attempt last month.