Theranos Inc. said it will shut down its blood-testing facilities and shrink its workforce by more than 40%.

The moves mark a dramatic retreat by the Palo Alto, Calif., company and founder Elizabeth Holmes from their core strategy of offering a long menu of low-price blood tests directly to consumers. Those ambitions already were endangered by crippling regulatory sanctions that followed revelations by The Wall Street Journal of shortcomings in Theranos’s technology and operations.

The...