He returned to Birmingham and played a handful of games before his final game against Manchester United in April when he scored with a free-kick but it later became known he had already ruptured his right knee earlier in the game.
Blues boss Steve Bruce said: "Martin has now made it official that he has had to retire - what a way to go, bending a free-kick around the wall against Manchester United. "He has been a really great servant for this football club. You don't get many like him, that's for sure. Grainger has moved back to London with his family.