Mercedes, whose Formula One team have been world champions for the past three seasons, said in a statement that it was carrying out a "strategic repositioning of its motorsport activities".
"This new approach will see Mercedes-Benz competing at both ends of the motorsport spectrum," it added.
"In Formula One, the pinnacle of motorsport combining high technology and the most demanding competitive challenge; and in Formula E, which embodies the transformation that is underway in the automotive industry."
Mercedes already had an entry option for 2018/19, announced in October last year.
Audi also announced last October that it was quitting the Le Mans 24 Hours sportscar race and related world endurance championship to shift resources to Formula E.
Other manufacturers already involved in the electric series include German rivals BMW as well as Renault, Jaguar, Citroen and India's Mahindra.
Mercedes has won 10 drivers' and 13 team titles in their 26-year involvement in the DTM, with 183 race wins.
"Our departure from the DTM brings a long-standing motorsport era to a close," said Jens Thiemer, the vice-president for marketing at Mercedes-Benz Cars. "It is now time to start on a new path."
Mercedes said Formula E, which recently held its first races in New York, offers a "perfect platform to demonstrate the competitiveness of our technology brand EQ in a racing environment, in the area of battery electric powertrains."
The carmaker will market future battery powered electric vehicles under the EQ brand.
"In motorsport like in every other area, we want to be the benchmark in the premium segment and to explore innovative new projects," said Mercedes motorsport head and Formula One team boss Toto Wolff.
"The combination of Formula One and Formula E delivers that. Formula E is like an exciting start-up venture: it offers a brand new format, combining racing with a strong event character, in order to promote current and future technologies."
"I am pleased that we were able to extend our entry option for one year to the 2019/20 season. This gives us time to properly understand the series and to prepare for our entry in the right way."
(Reporting by Alan Baldwin, editing by Pritha Sarkar)
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