Kyl, the second-ranking Republican in the Senate, said at a news conference that it was time to give someone else a shot at the seat he's held since 1994.
"There is no other reason than the fact it is time," Kyl said of his decision to retire after 2012. "It is time for me to do something else and time to give someone else a chance."
Kyl, 68, whose father was a congressman from Iowa, served 10 years in the U.S. House before being elected to the Senate. He was re-elected twice, most recently in 2006 when he beat developer Jim Pederson, a former state Democratic Party chairman.
"I think it's a big loss for the country," Senate Republican Leader Mitch McConnell said of his No. 2 at the Conservative Political Action Conference, an annual gathering of party activists. "The good news is that he'll be here for the next two years."
Kyl said he'll spend those years forming a coalition with other senators who have announced their retirements to work without political pressures on tough issues like immigration reform. He said he does not know what he will do after he leaves office, but it won't involve elected office.
"Some people stay too long, and there are other things to do in life," Kyl said. "I never expected to be in office for 26 years."
Kyl is the fifth senator to announce plans to retire, with Jim Webb, D-Va., Kent Conrad, D-N.D., Kay Bailey Hutchison, R-Texas, and Joseph Lieberman, I-Conn., all leaving after 2012.
The GOP should be favored to hold on to the seat in heavily Republican Arizona, where the party was hugely successful in the midterm elections. Rep. Gabrielle Giffords had been mentioned as a strong Democratic candidate for the seat before she was shot in the head at a political event one month ago.
Kyl has a reputation as a hardworking conservative who toiled on home-state and national issues, particularly ones involving national defense and judiciary topics, while being overshadowed for years by the state's senior senator, fellow Republican John McCain.
Kyl most recently made headlines for his opposition to a U.S.-Russia nuclear treaty that was a top foreign policy priority of President Barack Obama.
He entered the Senate by winning a seat held by Democrat Dennnis DeConcini, who did not run for a fourth term. He defeated Democrat Sam Coppersmith, a one-term U.S. representative, by a nearly 3-2 margin.
In 2000, Kyl cruised to re-election when Democrats didn't even both putting up a candidate. Kyl crushed two minor party candidates and an independent. Six years later, Kyl had a roughly 150,000-vote edge over Pederson, out of roughly 1.5 million votes cast.
Pederson, a shopping center developer, sunk $10 million of his own money into the race.
Republicans mentioned as possible candidates for the seat include U.S. Rep. Jeff Flake, former U.S. Rep. John Shadegg and former state Treasurer Dean Martin. Another Democrat whose names figure in speculation is former Gov. Janet Napolitano, currently the U.S. Homeland Security secretary.