The 30-year-old former Waikato Chiefs captain is acting on the medical advice of a number of specialists both from within Irish rugby and elsewhere.
He joined Connacht at the start of the 2013/14 season on a three-year deal. His previous experience with the Chiefs as a double Super Rugby-winning captain meant that he played a key role both on and off the field at Connacht.
Clarke's leadership credentials became apparent upon his arrival at the Sportsground and he was appointed captain for the season. He made 15 appearances in the Connacht jersey, starting in the second row on every occasion - including five Heineken Cup games.
His last appearance for the province came against Heineken Cup finalists Saracens at Allianz Park in January. A head knock sustained in that pool match ruled him out of any further action, while medical experts carefully monitored his symptoms over the last few months.
Based on the medical advice presented to him, he made the decision to end his playing career.
Commenting on the news, Connacht team manager Tim Allnutt said: "Craig was obviously one of the biggest signings we've ever had at Connacht and it was huge for us to get someone of his experience.
"But he also had all the qualities of a Connacht team man and we are extremely disappointed for him that his time with the club has been cut short. As is the case with every player, the priority is his health and we're thankful that every precaution has been taken here.
"Despite his short stint here, Craig brought an abundance of knowledge and expertise with him to Connacht. He was an enthusiastic teacher who gave generously of his time to the younger forwards.
"He will of course be missed but we wish himself, Veree and their daughter Isabella all the best for the future in New Zealand and thank him for everything he has done in his short time with Connacht."
Connacht head coach Pat Lam added: "Craig could see the potential we have as a young team and he wanted to be a part of that. He was continuously driving standards and challenging areas that needed to be challenged.
"His consistent, high class performances on the pitch meant he earned massive respect from the outset. Even when he was unable to play, he was always helping and mentoring others, encouraging guys from the sidelines in training, staying around to do analysis on other teams and sitting with Dan (McFarland) on the forwards' play.
"His work ethic and attitude was inspirational and he had a major influence, leaving a lasting impression on the squad."
Clarke himself commented: "While it is of course extremely disappointing the way my career has come to an unexpected end I am, at the same time, so thankful for the opportunities afforded to me through my involvement in the professional game.
"Everyone involved in my school, club and professional rugby including team-mates, coaches, management staff, medical staff, referees, administrators and volunteers have all helped me along the way.
"I am proud of what I have achieved. I have experienced tough times with teams which has just made me appreciate the good times all the more.
"While I will always be disappointed not to have worn the black jersey of my country, I will sleep easy knowing that I gave it a real crack, particularly in my last three seasons playing in New Zealand.
"Of course I understand that health takes priority over sport every time, but I still can't escape the disappointment that I couldn't contribute to Connacht Rugby as I would have liked and envisaged before my arrival.
"It was a challenging season in terms of results, but so rewarding in other ways. There are a fantastic group of people here at Connacht and they work extremely hard for everything they have.
"I really enjoyed getting to know my teammates and working with the coaches. My rugby knowledge benefited hugely, especially around northern Hemisphere set piece play.
"There will be a lot I'll remember from my time in Ireland. Naturally, our victory over Toulouse was a huge highlight but there are other little things I'll never forget. The Connacht fans are like no other I've ever encountered. The first time I ran out through the Clan Stand and on to the pitch, the hairs on the back of my neck stood up.
"I've never experienced such noise and atmosphere, and from within a relatively small stadium. They are an amazing bunch of supporters and I'd like to thank them for making me feel so welcome here.
"The clapping off of the opposition after a game (except for Toulouse who stormed off straight away after we beat them!) is also something that is unique and special to this part of the world, as is the silence of the crowd when kicks at goal take place.
"I've really enjoyed my time here. Myself and my family will now return to New Zealand and start work on our farm there.
"I'm also excited about the prospect of getting into coaching at any level and continuing my involvement in the game.
"I am looking forward to new challenges in life and to spending time with my extended family back home. I will of course be keeping a keen eye on Connacht Rugby and their games next season.
"The birth of our little girl Isabella in Galway means that we will always have a connection with the west of Ireland, and it will be a great excuse to visit again in the not too distant future."