The 71-year-old Scot ended intense speculation about his future at Old Trafford by confirming he would step aside after champions United's last game of the season at West Bromwich Albion on May 19 - his 1,500th in charge.
His decision brings the curtain down on a glittering era for the country's best-supported club which included 13 English league titles, two European Cups, five FA Cups and four League Cups as well as the FIFA Club World Cup.
Everton boss David Moyes, a Glaswegian like Ferguson, is strongly tipped to be United's next manager with one British bookmaker offering odds of 20/1 on.
Former Chelsea coach Jose Mourinho is also in the running to fill the void left by the retiring Scot and is priced at 10/1.
United chief executive David Gill told the club's in-house television channel MUTV they would move "relatively quickly" in naming a successor.
Ferguson arrived in Manchester in 1986 after Ron Atkinson was sacked and, after a difficult start, began building an empire that shows no sign of crumbling with the club recapturing the English title from Manchester City this season.
"The decision to retire is one that I have thought a great deal about and one that I have not taken lightly. It is the right time," Ferguson, who has won nearly 900 of his 1,498 matches in charge, said on United's website.
United said Ferguson, who is to undergo hip surgery during the off-season, would remain at the club as a director.
"It was important to me to leave an organisation in the strongest possible shape and I believe I have done so," added Ferguson who had announced he would retire after the 2001/02 season before changing his mind.
"Going forward, I am delighted to take on the roles of both director and ambassador for the club," he said.
"With these activities, along with my many other interests, I am looking forward to the future."
Ferguson, who in 2010 surpassed Matt Busby's as the longest-serving manager in United's history, had not hinted at retirement in his programme notes for Sunday's game against Chelsea, suggesting he was keen to continue.
Bobby Charlton, a member of Busby's side that won the European Cup in 1968 and still a director, said United's dominance of the English game was solely down to Ferguson.
"I am a director but I hardly do anything because we are winning all the time and it is all down to Alex Ferguson," Charlton said at a stamps launch at Wembley on Wednesday.
"He is such a fantastic manager. Everything he has done has been fantastic."
'MASSIVE SHOCK'
The suddenness of his decision left some who served under him in a state of disbelief.
"I'm shocked, it's a bombshell," said former United goalkeeper Peter Schmeichel, who was part of the 1998/99 team who won the Premier League, Champions League and FA Cup.
"I'm disappointed and very, very sad. He had always said he would retire when something in his life wasn't right, and it must be somethin
