Widespread reports emerged overnight claiming that the Scotsman was considering stepping down from his role with the Premier League champions ahead of a scheduled hip operation this summer.
While the club had initially refused to confirm or deny the rumours, the North-West outfit have since announced that the 71-year-old will leave his post just weeks after guiding the club to their 20th league title.
"The decision to retire is one that I have thought a great deal about and one that I have not taken lightly," Ferguson told the club's official website. "It is the right time."
Owner Avie Glazer added: "I am delighted to announce that Alex has agreed to stay with the club as a director. His contributions to Manchester United over the last 26 years have been extraordinary and, like all United fans, I want him to be a part of its future."
Chief executive David Gill, who will also leave his role at the end of the season, 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 leaves the English champions with 13 Premier League titles, five FA Cup trophies, two Champions League honours and 20 other pieces of silverware.