Clarke, standing in for injured skipper Ricky Ponting, presided over an Australian team thrashed by an innings and 83 runs in the final Sydney Test and made the announcement during his post-match press conference.
Cameron White was later named captain of Australia`s side for their two T20 games against England next week, with wicketkeeper Tim Paine his deputy.
It was a personal series failure by one of Australia`s senior Test batsmen, scoring just 193 runs at 21.44 in nine innings against the dominant English bowling attack.
"I`m retiring from international Twenty20 cricket," Clarke said.
"I guess, looking back on this series, my Test cricket isn`t where I want it at the moment.
"This gives me the opportunity to focus wholly and solely on Test cricket and one-day internationals and to use that time to play more domestic or first-class cricket for NSW (New South Wales) and become a better Test player.
"For me, I`ve always said Test cricket is the ultimate for me. This gives me that opportunity."
Clarke admitted that even as skipper he has struggled in the T20 format of the game, scoring just 419 runs in 23 innings at 22.05.
"Obviously, my T20 performances haven`t been that great, which made the decision that much easier," he said.
"As vice captain, my focus is to do whatever I can to help this Test team turn it around."
Clarke refused to blame the explosive scoring demands of T20 cricket on his Test form slump.
"I`m not going to blame anyone or anything," he said. "I think T20 cricket in general is great for this game.
"It`s very individual. I`m certain players can play all three forms of the game. I`m probably not one of them.
"I`ve worked out that for me to be the best Test cricketer I can be, and the best one-day cricketer I can be, I need to focus wholly and solely on those two forms."