The Spain international, who has won the European Championships in 2008 and then again in 2012, has struggled with injuries for the past three years.
An Achilles injury sustained in October 2016 was to prove critical for the 33-year-old, with fears he could even lose his leg at one point.
Chief executive Ivan Gazidis said: “Santi is always one of my favourite players to watch.
“His natural ability with both feet, his speed of thought and movement were central to our best performances in recent years.
“He plays with a joy and freedom which is very rare.