The Liverpool-born fighter, who has won 23 fights and drawn one, earned the belt last October by defeating John Thompson in seven rounds.
Smith's Mexican opponent has a 47-fight win record, 33 by way of knockout, and the only blemish is a defeat to Floyd Mayweather Jr.
Alvarez recently had joy over another British opponent as he knocked out Amir Khan in the sixth round in May.
"I am delighted to get the opportunity to defend my world championship again, this time against the biggest name in world boxing, Canelo Alvarez, and headline in America which is a dream I have had since I started in boxing," Boxing News quotes Smith as saying.
"This fight will allow me to make a name for myself in the US and show the Americans and Mexicans just how good I am. As soon as I became world champion my next goal was to make my name across the Atlantic and this is the big stage that will enable me to do that."
Alvarez added: "I am very pleased to announce my next fight against Liam Smith, a tremendous fighter with real knockout power, and the WBO super-welterweight world title owner. I have no doubt that this fight will be give and take, which will fill the expectations of the fans, and I will work with all the enthusiasm as I always do to get the upper hand on September 17."
Earlier this month, Smith managed to dislodge challenger Predrag Radosevic in the second round in a bout on Merseyside.