Button was standing in for Fernando Alonso who is taking part in the Indy 500 later today, and he started from the back after receiving a grid penalty in qualifying.
But he was then forced to retire completely after lap 62 while sitting in last place.
It marks a miserable season for McLaren with both of their racers dropping out in Monte Carlo.
Sebastian Vettel won the race to extend his lead at the top of the Drivers' Championship after pipping Kimi Raikkonen.
Pascal Wehrlein crashes during Monaco Grand Prix Sun, May 28, 2017
Pascal Wehrlein crashed out during the Monaco Grand Prix after a collision with Jenson Button
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Pascal Wehrlein crashes out after a collision with Jenson Button
Button's return to F1 for this weekend has been met with excitment but he struggled in the McLaren car which has been dogged all season.
And he was unable to bring it home after colliding with Wehrlein's Sauber.
Wehrlein ended up in the wall with the car upright.
Button's crash was the major talking point of a largely processional affair at the principality, which ended with Vettel moving 25 points – the equivalent of a race victory – clear of Hamilton in the championship race.
Hamilton is a two-time winner in Monaco, but the 32-year-old Briton has mysteriously struggled with the handling of his Mercedes car this weekend. And following his troubled performance in qualifying, he had it all to do on Sunday at a track where is virtually impossible to overtake.
Monaco Grand Prix 2017: Jenson Button forced to retire after colliding with Pascal Wehrlein
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Pascal Wehrlein sent his car into the wall after colliding with Jenson Button
As Raikkonen led Vettel and then Bottas through Sainte Devote on an opening lap which passed without any incident, Hamilton progressed one place to 12th, and that is where he remained for much of the early knockings.
A gearbox failure for Renault's Nico Hulkenberg before Sergio Perez pitted for a new front wing promoted him to 10th, but the triple world champion, complaining of poor grip, was already 35 seconds behind race leader Raikkonen by the end of lap 24.
Raikkonen, who had started on pole for the first time in nearly nine years, bossed the early running, but Ferrari's decision to pit him five laps earlier than Vettel scuppered his hopes of winning.
Indeed it was Vettel who emerged comfortably ahead of his team-mate and, despite the late drama, that is how it remained.
It marked Ferrari's first one-two finish since 2010, but Raikkonen cut a dejected figure during the podium presentations.
Hamilton also chose to stop late into the race. The Briton was the last of all the drivers to take on fresh rubber which allowed him to move up into seventh.
The race had looked set to pass off without any notable incident before Button crashed with Wehrlein with 18 laps remaining.
The field bunched up under the safety car, but Vettel remained in charge of the race to strike a major blow to Hamilton's hopes of winning a fourth title.
British driver Jolyon Palmer finished one place outside the points in 11th, while Stoffel Vandoorne completed yet another poor afternoon for McLaren after he crashed out with 11 laps to run.