The 32-year-old was part of the Vatreni squad that reached the nation's first World Cup final this summer, succumbing to a 4-2 defeat to France in Moscow.
Mandzukic netted three goals for Zlatko Dalic's side in Russia, including an extra-time winner against England in the semi-finals, as well as a consolation goal in the final.
"As much as the silver fills me with new energy, it makes it easier to make this impossible decision," the Juventus forward wrote on Instagram.
"This month, as well as the arrival home, will remain the most important memory of my career.
"It was the most beautiful trip. I am overjoyed, filled with heaven, proud of the silver we have been fighting for for years, through a lot of effort, disappointment, and heavy moments.
"There is no ideal time to go. If we can, I believe that we all would play for Croatia so long as we're still alive because there is no greater pride. But I feel that the moment is for me now."
Mandzukic scored 33 goals in 89 appearances for Croatia, putting him second only to Davor Suker in the country's all-time leading goalscorer list.