By Richard Galpin
BBC News, Moscow
Mr Putin is barred by the constitution from standing in presidential elections due to be held in March, having already served two consecutive terms as president.
The announcement came during a congress of the dominant political party United Russia, which is controlled by the Kremlin.
In his speech during the opening day of the congress, Mr Putin said there were two conditions which had to be met for him to shift from the presidency to becoming prime minister.
"First, United Russia must win the state Duma (parliament) elections on 2 December," he said.
"And second, a decent capable and modern person with whom I can work as a team should be elected as president."
The announcement was greeted with applause by party leaders and ordinary members who are all loyal to Mr Putin.
They know it is almost certain that these conditions will be met.
United Russia is expected to gain a large majority in the elections particularly after Mr Putin also announced on Friday that he would head the party's list of candidates for the parliamentary vote.
And analysts agree that whomever Mr Putin backs to succeed him as president is almost certain to be elected in March.
Mr Putin, who has concentrated much power in his hands since first becoming president more than seven years ago, has long made it clear he wants to remain at the centre of political life in Russia after officially leaving the Kremlin.
But until now he had kept quiet about how he intended to achieve this.
Becoming prime minister was one of many possible scenarios put forward by Kremlinologists in the absence of solid information.
This scenario includes changing the constitution to transfer the executive powers currently enjoyed by the president to the new prime minister.
It also assumes that whoever succeeds Mr Putin as president will be a loyal ally without a power-base of his or her own who would not represent any threat to Mr Putin in his new role.
The person who fits that description well is the man president Putin nominated as prime minister in another surprise move two weeks ago - Viktor Zubkov.
Mr Zubkov was plucked from obscurity from his previous job as head of a financial investigation agency.
But shortly after becoming prime minister, Mr Zubkov refused to rule out running for president in next year's election.
Opposition politicians have criticised President Putin's latest announcement that he will stand for parliament and may become prime minister as anti-democratic and unconstitutional.
"What Putin did today is a real step to creating in Russia, a one-party system," Grigory Yavlinksy, leader of the Yabloko party, told the BBC.
"It's a very dangerous step."
But with the Kremlin controlling much of the media and continuing to suppress opposition groups, it seems unlikely that many ordinary Russians will object to Mr Putin's apparent game-plan.The president continues to ride a wave of popularity which he seems determined to exploit so he can remain in power for many more years.
U.S. State Department spokesman Tom Casey yesterday declined to comment on whether Putin's plans would give him too much control. `
`We'll be keeping a close eye on it,'' Casey said. ``But certainly to the extent that he's doing this within the context and limits of Russian law and Russia's legal system, that's certainly his choice to make.''
The Nixon Center's Simes, asked if anything could prevent Putin from retaining power, said
no, ``unless you assume God is Russian. No one else.''