The Puerto Rican says his 17-year professional career is over after he lost out on points in his 47th fight at Madison Square Garden against Ali.
After 12 rounds of a bout that ebbed and flowed, Ali was given the victory by all three judges, edging out his more experienced opponent 115-113, 115-113 and 116-112.
Cotto, who is a six-time world champion across four different weight divisions, says he will now focus on spending time away from the sport with his family.
"I want to be happy in my home and enjoy my family," he said afterwards. "Sadam won the fight. It is my last fight."
Cotto has claimed plenty of memorable wins throughout his career, seeing off Paulie Malignaggi, Shane Mosley and Ricardo Mayorga, amongst others, while losing to superstar Floyd Mayweather, Filipino legend Manny Pacquiao and Saul 'Canelo' Alvarez.