He hasn't retired from playing tennis, but he has had to withdraw from two major competitions this year: The Paris Masters and the London ATP World Finals. This is due to a longstanding knee problem, which has been especially bad this year. He was also defeated in the second round of Wimbledon in June 2012 and was not able to compete in the London Olympics or the US Open, so this really has been a difficult year for him. The problem now is a tear in the patella tendon, which has needed a lot of treatment. He is getting better but will probably not be competing anywhere this year now.
Nadal has had problems before. In 2005 he had a foot injury that stopped him winning a championship, and again in 2009, when he was world no. 1, he was unable to defend his Wimbledon title because of a knee injury.