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.
Everton’s David Moyes is the bookmakers’ favourite to take over, with Jose Mourinho, currently at Real Madrid, also tipped.
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”. (BBC)