Ferguson, 71, has led Manchester United for 26 seasons. In that period his teams have won 13 Premier League titles, two European Cups, five FA Cups, four League Cups and a European Cup Winners' Cup.
"The decision to retire is one that I have thought a great deal about. It is the right time," Ferguson said in a statement Wednesday.
He will manage Manchester United through games Saturday against Swansea City and May 19 versus West Bromwich, when the season ends, before taking a position as team director and ambassador.
"It was important to me to leave an organization in the strongest possible shape and I believe I have done so," Ferguson said. "The quality of this league-winning squad and the balance of ages within it bodes well for continued success at the highest level whilst the structure of the youth set-up will ensure that the long-term future of the club remains a bright one."
Ferguson won his first league title with United in 1993, which ended a 26-year championship drought for the club, and he is the most successful manager in the history of British soccer, amassing 38 trophies during his career with United.
His most memorable season was 1998-99 when Manchester United won the Premier League title, FA Cup and UEFA Champions League.