British rider Smith agreed a similar deal in March while Finland's Mika Kallio has been appointed test rider.
"I saw the opportunity to try something different," said Espargaro, whose older brother Aleix races in MotoGP for Suzuki, at the Grand Prix of Catalunya.
"Working together with KTM will be crazy hard, but I'm ready to work."
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.
Espargaro's departure leaves Tech3 with two vacancies for 2017 and a headache for team boss Herve Poncharal.
"At the moment I am not a very happy man, not a very happy team manager," he told motorsport.com. "Our bike is very, very competitive but for some reason nobody wants it."
He said Tech3 were talking to Spaniard Alex Rins and France's reigning Moto2 champion Johann Zarco.
(Reporting by Alan Baldwin in London, editing by Amlan Chakraborty, Neville Dalton)
Share
