Donington hosted its last Formula One race in 1993
The British Grand Prix will move from Silverstone to Donington Park from 2010 as part of a new 10-year deal.
Silverstone, which had been home to the race since 1987, is owned by the British Racing Drivers' Club, who had been in talks to secure a new deal.
"We wanted a world class venue for F1, something teams and fans could be proud of," said F1 supremo Bernie Ecclestone.
"Donington's development plans will give us exactly that, a venue to put British motorsport back on the map."
Ecclestone said he was disappointed that the government had not intervened to help the Northamptonshire venue retain the race.
"I am sorry that we could not have helped Silverstone to raise the money to carry out the circuit improvements and run F1," he said.
Timing of GP switch embarrassing - Hill
"I believe that the government should have supported them, which would have cost probably less than .002% of the government's commitment for the Olympic Games."
Max Mosley, the president of international motorsport's governing body the FIA, said he was glad that the future of the race had been secured.
"After many years of patient but fruitless negotiation with the BRDC, we are delighted that Bernie has nevertheless been able to ensure that the British Grand Prix will keep its place on the F1 calendar," he said.
My experience with Formula One is that things are typically always in a state of flux and I don't think the fat lady has sung just yet
BRDC president Damon Hill
"We understand that the development programme planned for Donington will achieve the very high standards we expect from a modern F1 circuit.
"Finally, British fans will get the venue they deserve."
Silverstone Circuits Limited and the BRDC said they were disappointed by the verdict and that they were considering their position.
"It is particularly disappointing to receive this information during the course of the British Grand Prix weekend, while we are celebrating 60 years of Silverstone and 80 years of the BRDC," said a statement.
BRDC president Damon Hill echoed their sentiments.
"Anything which indicates a secure future for the British Grand Prix must be welcomed," he said.
"Nevertheless, the timing of this announcement is disappointing and a blow to the excellent and hard working staff of Silverstone."
However, the former world champion believes that with plenty of improvements still needed at Donington, in a relatively short time, to bring it up to Formula One standard, the matter is not at an end.
"My experience with Formula One is that things are typically always in a state of flux and I don't think the fat lady has sung just yet," Hill told BBC Radio 5 Live.
"Silverstone is always going to be here and holding motorsport events. We want to make sure the British Grand Prix stays on the calendar but we believe at Silverstone we have the best venue and the venue that can provide a future for the race going forward.
"Our plans are sitting there still ready to go and we'll have to wait and see what happens over the next few months.
"There is a considerable amount of work that needs to be done at Donington. I'm not saying it can't be achieved but in our experience making changes to any venue in the UK requires an awful lot of planning consent and convincing of local authorities."
Interview: Donington Park boss Lee Gill
This is not the first time Ecclestone has taken the race away from Silverstone.
In 2000, the venue lost the contract to Brands Hatch, but the move never happened as development plans fell foul of planning permission laws.
Donington Park is on the border of Derbyshire and Leicestershire.
The circuit's owners Simon Gillett and Lee Gill have a five-year, £100m investment programme lined up, and said they were "delighted and extremely proud" to have clinched the deal.
"At the beginning of last year when we acquired the circuit, we made clear our commitment towards realising the full potential of the Park by making the necessary investments that will see Donington revitalised," they told the Donington Park website.
"To that end, we have now entered a new and exciting chapter in the development of the Park and one that will bring significant investment and regional development while securing the future of one of the most important and significant sporting events in Britain."
BBC 5 Live Formula One commentator David Croft said the news was "a huge blow to Silverstone but at least it's very good news for British fans whose race will still be on the calendar a year after the contract finishes".
Donington Park last hosted F1 in 1993, when Ayrton Senna drove one of his greatest races to win the European Grand Prix.
Ayrton Senna (right) was the last F1 race winner at Donington
The track has a Grand Prix history that dates back further than Silverstone's.
The first Grand Prix at the track was in 1935, and it held races until the outbreak of the second World War, famously hosting the battle between the Silver Arrows of Mercedes and Auto Union (the fore-runner of Audi) in 1937 and 1938.
However, it will need a huge overhaul to come up to F1's standards.
The track will need lengthening, and while Silverstone's facilities have been consistently criticised by Ecclestone, Donington's are currently nowhere near the standard of those at the Northamptonshire track.
Many more millions will need to be spent at Donington to bring its facilities up to F1's standards than would have been needed at Silverstone.
The track, which also hosts MotoGP's British Grand Prix, is located close to East Midlands airport, and about two miles from the M1 motorway, but access to the venue remains a problem.
Some spectators took hours just to get out of the car park at the end of last month's MotoGP race.
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