Double Formula One world champion Fernando Alonso will return to the Renault team next season.
Alonso finished third in this year's Formula One championship
Renault say the 26-year-old Spaniard, who left McLaren last month after a tempestuous season, has signed a two-year deal.
Renault's former test driver, Brazilian Nelson Piquet Jr, has been promoted to the race team as Alonso's team-mate.
Renault would not confirm the value of the contract, although there are reports Alonso will earn £25.2m.
Alonso is believed to have negotiated number one status with Renault.
Finn Heikki Kovalainen, who had an impressive rookie season with Renault in 2007, is expected to move to either McLaren, where he would partner Lewis Hamilton, or Toyota.
Kovalainen, who is managed by team boss Flavio Briatore, was considered by the team to be good enough to challenge Alonso, and therefore keeping him was not in the interests of a harmonious team.
Renault had a difficult year in 2007, but I am confident they can produce a fast and competitive car and be back at the top in 2008
Alonso said: "This is the team where I grew up as a driver in F1. Now it is time for us to begin a new chapter together.
"I am very excited about working with this great team once more, and confident that together we can move back to the front of the field.
"Renault had a difficult year in 2007, but I know that the team has real strength in depth. I am confident they can produce a fast and competitive car and be back at the top in 2008."
Alonso said he had chosen Renault over the other teams interested in him - which included Red Bull and Toyota - because "of their strong track record".
Briatore added: "We are delighted to be welcoming Fernando back home to the team where he enjoyed his greatest success.
"His abilities as a driver and a team leader are well known, and we look forward to forging another strong partnership.
Alonso had a successful spell at Renault before McLaren
"What's more, he knows the team well and how we operate; he will feel comfortable straight away in this environment."
Alonso had been linked with a return to Renault since it became clear during the summer that his position at McLaren had become untenable.
The relationship between Alonso and McLaren was strained from the start of the season, and it degenerated beyond repair during the spy scandal that rocked the team.
The two parties reached the point of no return during a row between Alonso and team boss Ron Dennis at the Hungarian Grand Prix in August.
During a disagreement about Alonso's status within the team, he threatened to reveal incriminating e-mails about McLaren's knowledge of confidential technical information belonging to Ferrari to governing body the FIA.
Although Alonso soon apologised, that was not before Dennis had phoned FIA president Max Mosley to tell him of his driver's revelation.
McLaren, who were found guilty in July of possessing the Ferrari information but not punished by the FIA , were called back before its world council and this time fined $100m (£49m) and excluded from the 2007 constructors' championship.
Without Alonso, Renault struggled in 2007 because of design flaws in their car and problems adapting to the control tyres that were introduced last season.
They are considered likely to be more competitive in 2008.
Piquet is the son of triple world champion Nelson Piquet, who won titles with Brabham in 1981 and '83 and Williams in '87.
Briatore said: "Nelsinho is one of the most promising young talents in motorsport.
"After his success in [feeder category] GP2, he has spent a year learning the ropes as our test driver and getting to know the team; he is now ready to step up to the next level."
Frenchman Romain Grosjean, the Formula Three Euroseries champion, will step into Piquet's shoes as test and reserve driver.