Schumacher is second in the championship, just two points behind Renault's Fernando Alonso.

Finland's Kimi Raikkonen and Brazilian Felipe Massa will race for Ferrari next season, the team said.

It was not clear what future position Schumacher might take with Ferrari but the team said they would define his role at the end of the year.

"Now I just want to concentrate on the last three wins and finish the season in style, hopefully with the championship. We took a big step today," said Schumacher.

Thousands of Ferrari fans, who had appealed through banners and chants for the German to stay on with the team, poured on to the track at the end of the race, paying an emotional tribute.

"I had always said that the decision to retire would be his alone, but now that decision has been taken I feel a sense of sadness," said Ferrari president Luca di Montezemolo.

Ferrari team boss Jean Todt added: "Michael has been the author of a unique chapter in the history of Formula One and of Ferrari in particular.

"It has yet to reach its conclusion and what he has achieved extends over and above the results obtained. He is an exceptional man and will become a legend as a driver," he said.

The German has won an unprecedented seven titles in a career that has seen him set a long list of records, including most wins, pole positions, podium finishes, fastest laps and wins in a season.

Raikkonen, currently with McLaren, has agreed a three-year deal while Massa's contract was extended to the end of 2008.

Schumacher said he was happy with the signing of Raikkonen.

"I was really pleased to hear that he would be the person," said the German.