The Scot, 71, has won 38 trophies during his reign at Old Trafford and will now become a director and ambassador for the club.
His haul includes 13 league titles, two Champions League crowns, five FA Cups and four League Cups.
"The decision to retire is one that I have thought a great deal about. It is the right time," Ferguson said.
His haul includes 13 league titles, two Champions League crowns, five FA Cups and four League Cups.
"The decision to retire is one that I have thought a great deal about. It is the right time," Ferguson said.
BBC sports editor David Bond says United are confident of announcing a successor to Ferguson before the weekend.
He believes they are looking for someone who understands the club's history and is committed to youth development while employing an attractive, attacking style of football.
While United look for his successor, tributes to Ferguson have been led by Prime Minister David Cameron, who tweeted: "Sir Alex Ferguson's achievement at #MUFC has been exceptional."
Former Manchester United and England striker Michael Owen says the Scot's managerial record will "surely never be eclipsed".
Ferguson believes the squad he leaves behind "bodes well for continued success".
His final game will be against West Brom and will be his 1500th in charge at United.
United co-chairman Joel Glazer says: "His determination to succeed and dedication to the club have been truly remarkable."
Chief executive David Gill says: "What he has done for this club and for the game in general will never be forgotten."
Ferguson, who will undergo hip surgery in the summer, is confident his successor will take over a club in good health after winning their 20th top-flight title 17 days ago.
"It was important to me to leave an organisation in the strongest possible shape and I believe I have done so," he 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."
"It was important to me to leave an organisation in the strongest possible shape and I believe I have done so," he 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's Man Utd trophies
Premier League: 1993, 1994, 1996, 1997, 1999, 2000, 2001, 2003, 2007, 2008, 2009, 2011, 2013.
FA Cup: 1990, 1994, 1996, 1999, 2004
League Cup: 1992, 2006, 2009, 2010
Champions League: 1999, 2008
Cup Winners Cup: 1991
Fifa Club World Cup: 2008
Uefa Super Cup: 1992
Inter-Continental Cup: 1999
FA Charity/Community Shield: 1990 (shared), 1993, 1994, 1996, 1997, 2003, 2007, 2008, 2010, 2011
Ferguson praised the people he felt helped him build the club from a team that had not won a title for 26 years into one of the biggest in the world.
"I must pay tribute to my family, their love and support has been essential," he added. "My wife, Cathy, has been the key figure throughout my career, providing a bedrock of both stability and encouragement. Words are not enough to express what this has meant to me.
"As for my players and staff, past and present, I would like to thank them all for a staggering level of professional conduct and dedication that has helped to deliver so many memorable triumphs. Without their contribution the history of this great club would not be as rich.
"In my early years, the backing of the board, and Sir Bobby Charlton in particular, gave me the confidence and time to build a football club, rather than just a football team.
"Over the past decade, the Glazer family have provided me with the platform to manage Manchester United to the best of my ability and I have been extremely fortunate to have worked with a talented and trustworthy chief executive in David Gill. I am truly grateful to all of them.
"To the fans, thank you. The support you have provided over the years has been truly humbling. It has been an honour and an enormous privilege to have had the opportunity to lead your club and I have treasured my time as manager of Manchester United."
Ferguson is the most successful manager in the history of the British game and famously won the Premier League, FA Cup and Champions League in 1999.
Co-chairman Joel Glazer highlighted Ferguson's desire to produce winning teams throughout his time at United and called the 2008 Champions League victory over Chelsea in Moscow a "magical night".
He said: "Alex has proven time and time again what a fantastic manager he is, but he's also a wonderful person. His determination to succeed and dedication to the club have been truly remarkable.
"I will always cherish the wonderful memories he has given us, like that magical night in Moscow."
Fellow co-chairman Avie Glazer expressed how important the United board felt it was to ensure Ferguson continued working for the club despite his decision to step down as manager.
Gill, who is also stepping down this summer after 16 years at United, revealed Ferguson had been planning to make his succession easier by putting in place a young squad and a state-of-the-art training facility at Carrington.
He said: "I've had the tremendous pleasure of working very closely with Alex for 16 unforgettable years - through the treble, the double, countless trophy wins and numerous signings.
"We knew that his retirement would come one day and we both have been planning for it by ensuring the quality of the squad and club structures are in first-class condition.
"Alex's vision, energy and ability have built teams - both on and off the pitch - that his successor can count on as among the best and most loyal in world sport.
"The way he cares for this club, his staff and for the football family in general is something that I admire. It is a side to him that is often hidden from public view but it is something that I have been privileged to witness in the last 16 years.
"What he has done for this club and for the game in general will never be forgotten. It has been the greatest experience of my working life being alongside Alex and a great honour to be able to call him a friend."
Ferguson began his playing career at Queen's Park as a 16-year-old striker whilst working as an apprentice tool-worker at Clyde Shipyards.
He said: "I've had the tremendous pleasure of working very closely with Alex for 16 unforgettable years - through the treble, the double, countless trophy wins and numerous signings.
"We knew that his retirement would come one day and we both have been planning for it by ensuring the quality of the squad and club structures are in first-class condition.
"Alex's vision, energy and ability have built teams - both on and off the pitch - that his successor can count on as among the best and most loyal in world sport.
"The way he cares for this club, his staff and for the football family in general is something that I admire. It is a side to him that is often hidden from public view but it is something that I have been privileged to witness in the last 16 years.
"What he has done for this club and for the game in general will never be forgotten. It has been the greatest experience of my working life being alongside Alex and a great honour to be able to call him a friend."
Ferguson began his playing career at Queen's Park as a 16-year-old striker whilst working as an apprentice tool-worker at Clyde Shipyards.
