The decision, which technically puts the Government in a two-seat minority, is the first big propaganda coup for the multimillionaire's Eurosceptic party.
Sir George and Sir James, who are old friends, had been discussing the move for more than two weeks, but the MP finally decided to go ahead on Thursday and will fight his Reigate seat as a Referendum Party candidate. News of the defection was made public in Glasgow after a meeting of the party's candidates in Scotland.
Teresa Gorman, the Euro-sceptic MP, came close to endorsing Sir George's decision to fight the official Tory candidate. On Channel 4's A Week in Politics she said she would be "very tempted" to vote for Sir George if she lived in Reigate.
Sir George was de-selected by his constituency party earlier this year after an outspoken attack on Mr Major, whom he labelled a ventriloquist's dummy for Kenneth Clarke, the pro-EU Chancellor. In 1996 he had survived a similar move to oust him by promising to remain loyal.
Yesterday he played down the prospects of his defection bringing down the Government, insisting he was not "crossing the floor", even though he will be sitting as a Referendum Party MP. He added: "I am not interested in joining with Labour in humiliating the Government."