Chretien, who turns 70 in January, previously said he would retire as prime minister by February 2004. His former finance minister, Paul Martin, was chosen leader of the governing Liberal Party last week and automatically becomes prime minister when Chretien leaves office.
Chretien was expected to leave before February to comply with the desires of Martin, the Liberal Party and opposition parties for the transition to proceed.
Martin and Chretien met for 45 minutes Tuesday to work out a transition schedule, and they emerged to make the announcement.
"I'll offer him my best wishes and good luck. I will observe from the sidelines," Chretien said. "If he feels he wants to consult me, he knows my number."
Among Chretien's last orders of business will be attending the Commonwealth summit in Abuja, Nigeria, on Dec. 5-8. The meeting is expected to focus on Zimbabwe, which has been suspended from the organization of former British colonies due to repressive policies under President Robert Mugabe.
Since last week's overwhelming victory to succeed Chretien as Liberal leader, Martin has met with provincial and municipal leaders as part of a continuing campaign to promote his incoming government as a change from the three previous governments under Chretien.
In Canada's political system, the majority party in Parliament forms the government, with its leader as prime minister. No election is required for Martin to succeed Chretien, but Martin has indicated he will call one next year to seek a fresh five-year mandate instead of just serving out the final two years of Chretien's term.
Martin, 65, is a fiscal conservative credited with balancing Canada's budget during his nine years as finance minister. The son of a longtime Liberal Cabinet minister, Martin also promises an activist government for social policies.
Martin and Chretien are not close. According to the Toronto Globe & Mail, Tuesday's meeting was their first in 17 months.
A top priority will be soothing tensions between Canada and the United States after sour relations between Chretien and President Bush. The two countries share the world's biggest trade partnership, worth $1.4 billion a day.
Chretien angered Mr. Bush this year by refusing to take part in the war in Iraq, prompting the U.S. president to cancel a visit to Ottawa in May. Before then, some of Chretien's subordinates publicly ridiculed Mr. Bush over his unilateral policies, with one quoted as calling him a moron.
The prime minister said as early as August 2002 that he would be leaving office.