Hill, buoyed by his fifth place in last weekend's British Grand Prix, has vowed to help his team chief, Eddie Jordan, fulfil his aim of a top three championship finish.
The former world champion, who was widely expected to quit before the race at Silverstone after a disappointing season, instead will retire as originally scheduled in Japan on 31 October.
"I am looking forward to helping the Benson and Hedges Jordan team achieve their highest-ever constructors' championship position," said Hill, in an announcement made from his Spanish villa.
The 38-year-old's fifth place in his final home race, only his second points score of the season, consolidated Jordan's third place in the constructors' championship.
"We are all extremely pleased with Damon's decision," said the team's chief executive, Eddie Jordan, who is also on holiday aboard his yacht in Sardinia. "His contribution to this massive team effort is invaluable and we are all eagerly anticipating the last eight races."
Hill has requested that his testing duties over the remaining weeks of the season are reduced. He was scheduled to test in Monza this week but took a holiday with his family instead.
His team-mate, Heinz-Harald Frentzen, third in the drivers' standings in which he could challenge strongly given Michael Schumacher's lay-off through injury, and regular test driver Shinji Nakano will fill in.
Hill was expected to quit before Silverstone having just days before retired from a French Grand Prix at Magny-Cours in which he failed to qualify directly.
Jordan questioned whether he could allow his driver to continue given his emotional state and called up Dutchman Jos Verstappen for a two-day test. It was thought that he intended to install Germany's Formula 3000 driver Nick Heidfeld for the final eight races.
But amid speculation over contractual pay-off problems and pressure from sponsors who pay his reported pounds 5m-a-year salary, Hill insisted he would race on. He returns to the driving seat in Austria on Sunday week.Reuse content