The 1995 world rally championship winner, currently in second place in this year's title race behind Toyota's Carlos Sainz, will lead Ford's challenge, alongside Juha Kankkunen, as they develop the Focus car - the much-touted replacement for the Escort - next season, alongside the highly respected Malcolm Wilson.
"The move to Ford provides me with a unique and fresh challenge," McRae said. "I will play a major role in the development of a new world rally car. At the same time, Ford's total commitment to winning the championship means that my own ambitions do not have to be put on hold while the new car is developed."
McRae will be joined at Ford by his co-driver, Nicky Grist, who also signed a two-year contract with the team. The pair will make their debut in the Focus at the Monte Carlo Rally in January.
Subaru's technical director, David Lapworth, said he was sorry to lose the Scot. "The contribution that he has made to the success of Subaru over the years is enormous. His commitment to securing the world title for Subaru again this year is as strong as it ever was, so much so that I feel confident Colin will be leaving us as the 1998 world champion."
Although Subaru said yesterday that no decision would be made on a new driver until next month, McRae's departure could leave the way clear for his compatriot Richard Burns, currently with Mitsubishi.
The drivers' merry-go-round continues in Formula One, in the run-up to this weekend's Hungarian Grand Prix in Budapest. Jordan are expected to announce their team-line-up for next season this weekend, but it may not feature Ralf Schumacher.
The German has already been in talks with British American Racing, who have already signed Jacques Villeneuve for their F1 debut next season, and the young German is in the running for the second seat.
"Negotiations are quite open at the moment and it could go either way," a source close to Schumacher's manager, Willi Weber, said. "Willi will be talking to Eddie [Jordan] in Budapest, but a decision will not be taken until after the race. We want just a little bit more money out of Eddie, which is one of the main discussion points.
"Ralf would be happy to stay at Jordan because the team is getting stronger and stronger. I expect Damon to stay because he is important to Jordan and their main sponsors, Benson & Hedges. But Ralf has proved he can be a very fast and good racer and he deserves a better deal."