Armed with more than half a century of experience, Mr Peres’ dramatic announcement caps one of Israel's biggest ever political shake-ups and weeks of speculation.
"My period of service within the (Labour) party has come to an end," said the 82-year-old, who suffered a humiliating defeat by Amir Peretz for the Labour leadership earlier this month.
"His (Sharon's) mind is set to continue the peace process and he is open to new ideas for peace. I support his election to seek these aims,"
"It was not easy for me but I made a decision," he told a Tel Aviv news conference.
But, Mr Peres stopped short of announcing whether he would join Sharon's new centrist Kadima faction, only formed last week.
Peace hopes
Mr Peres, the Noble Peace laureate, wants to concentrate on bringing about peace with the Palestinians, saying his concern was deep, but his hope great.
"I decided to dedicate the next years to the supreme effort of making peace between our neighbours and us while keeping peace within us."
Mr Peres said that in addition to the internationally drafted roadmap peace plan, he and Sharon would work to create an "economic triangle of Israel, Jordan and the Palestinians which may enjoy a special status in the European Union".
He also said a Sharon administration would reopen discussions with the United States to secure the region against "the Iranian threat".
Mr Peres’ supporters appeared shocked at his decision to switch allegiances.
Dozens of young Labour activists held a demonstration outside the two times Prime Minister’s home in Ramat Aviv calling upon him not to leave the party.
The Jerusalem Post says the activists hoisted signs saying "Peres don't betray us."
Labour says ‘Good Riddance”
But top Labour officials believe Mr Peres’ departure can help the party.
"Peres for 20 years has been a burden that has harmed Labour," former MK Weizmann Shiri told the Jerusalem Post.
"No one seriously wants him to stay. I would be glad if he has finally left. He has undermined every Labour leader in the last decade. I give credit to Amir Peretz for not letting him undermine him."
The Jerusalem Post says a current, unnamed, Labour politician was even blunter, saying, "Good riddance. Labour would never have been able to recover as long as the shadow of Shimon Peres hovered over the party."
Some members within the Labour party have been calling on the veteran statesman to retire for years.
Former Knesset Speaker Avraham Burg and Labour Secretary-General Eitan Cabel had compared Mr Peres to an evergreen tree that doesn't let any new flowers sprout underneath.
"I called upon him to leave two years ago but I am sorry to see one of the top leaders I have seen go," Cabel told the Jerusalem Post.
"I think he shouldn't have left especially in such a dishonourable way that hurts his image. But I know Labour will recover. It's painful but it could lead to good things for Labour," he added.
Kadima’s popularity
Commentators believe a heavyweight Sharon-Peres partnership is the only ticket with the clout and experience to relegate both Likud and Labour to electoral annihilation.
Since Sharon left Likud in fury over its opposition to Israel's withdrawal from the Gaza Strip, opinion polls have put his Kadima party head and shoulders above rivals.
A survey published in the Yediot Aharonot newspaper predicted that the crisis-strewn Likud, leaderless and bogged down in slanging matches, would be in trouble if a general election was held now.
Yediot Aharonot predicted Likud’s number of parliamentary seats would be slashed from 40 to just 10 in the 120-member house.
While Kadima would win 34 seats, Labour 27 and the Orthodox Jewish party, Shas, 11.
Mr Peres is the second high-profile personality Wednesday to boost Kadima’s reputation, after the director general of the education ministry Ronit Tirosh announced she too was joining forces with Sharon.
The Palestinians have been looking on with fascination at the upheaval in Israel which their leader, Mahmud Abbas, compared to a coup.
"The transformations of the political parties in Israel represents a near political and social coup d'etat," Abbas said.
"We must wait to see what other changes will take place in Israel. We are interested in knowing who is going to represent the Israeli people and who is going to negotiate with us," he added.
Key player
Shimon Peres has been one of the key players in Israel's turbulent history.
He has a political pedigree eclipsing any rival, having held just about every major office in a career stretching back half a century.
Born in Poland in 1923, Peres immigrated to Palestine when he was 11.
He joined the Zionist struggle in the 1940s and met Israel's founding father, David Ben Gurion, while hitchhiking.
At 29, he became director general of the defence ministry and is considered the founding father of Israel's nuclear programme.
A member of parliament since 1959, Peres headed the Labour party from 1977 until Yitzhak Rabin took over in 1992.
He was prime minister from 1984-86.
Peres, once hawkishly rejected any compromise with hostile Arab states, but says he was converted after 1977, when Egyptian president Anwar Sadat made his historic visit to Jerusalem, leading to the first Arab-Israeli peace treaty.
The extent of international admiration for Peres was seen at his lavish 80th birthday bash in Tel Aviv, which attracted the likes of former presidents Bill Clinton and Mikhail Gorbachev.
But the European-style intellectual has never been so popular with Israelis.
The one-time foreign, defence and finance minister was defeated in general elections in 1977, 1981, 1984, 1988 and 1996.
He never led his Labour party to victory.
The highlight of his career came in 1994 when Peres was awarded a share of the Nobel Peace Prize along with Mr Rabin and the late Palestinian leader Yasser Arafat for his key role in negotiating the 1993 Oslo autonomy accords with the Palestinians.
A year later he was prime minister again after Mr Rabin was assassinated in November 1995, but he then lost the election to Likud's Benjamin Netanyahu in May 1996.
In 2000 he failed to secure the ceremonial post of president, losing to the relatively obscure Moshe Katsav.
Three years later, after a crushing poll defeat, Peres was again elected Labour leader.
In September, his alliance with Prime Minister Sharon saw Israel pull troops and settlers out of the Gaza Strip after 38 years.