KTM said in a statement at the season-opening race in Qatar on Sunday that Smith, currently with the Yamaha Tech3 team, had signed for 2017 and 2018.
The 25-year-old has been with the non-works Yamaha team in MotoGP since 2013.
"By signing Bradley Smith as factory rider for two years, we can now take the next step in the long journey to MotoGP," said KTM motorsport director Pit Beirer. "He was clearly the best rider among all the customer teams."
The new KTM RC16 bike is due to be presented at the Austrian Grand Prix in mid-August.
KTM are currently Honda's chief rivals in the Moto3 class, winning the title in 2012 and 2013.
(Reporting by Alan Baldwin, editing by Toby Davis)
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