Thorpe, who has been back in training since the end of last year, made the announcement at a packed media conference in Sydney today.
The 28-year-old was inspired by good friend Geoff Huegill's successful return to the pool at the Delhi Commonwealth Games and believes he can compete at the highest level despite a five-year absence.
But he also admitted that the lure of competing in London played a big part in his decision.
"I went to see the swimming venue for the London Olympics and it's an extraordinary venue and I could taste it, which is something I haven't felt for a very, very long time," he said.
"I didn't get back into the pool to get fit, I got back into it for [no] other reason to get back into the stage where I could compete at an elite level."
Thorpe collected nine Olympic medals, including five gold, 11 World Championship gold medals and 10 Commonwealth golds before announcing his shock retirement on November 21, 2006.
He also held 13 individual world records during his illustrious career.
Australia's most successful Olympian has dabbled in television presenting, fashion design and a wide range of business ventures since stepping out of the pool.
Thorpe, who has 19 months to prepare for his third Olympic Games, will be unable to compete internationally for at least nine months.
Under FINA regulations, competitors must be registered for drug testing for at least nine months before returning to competitive swimming, meaning the Sydney sider must apply by May in order to contest the Olympic trials next March.
Thorpe has been receiving training advice via text message by Australia's team coach Leigh Nugent, and did not tell his family of his return until this month.
"It hasn't been something that I have taken lightly, making a decision to return to competitive swimming," Thorpe said.
"I never thought this would happen.
"I never thought that I'd be swimming in a competitive way again."
"I'm very glad that I am.
"I'm glad I spent four years away from the pool.
"I needed those four years."
Thorpe said he came back as a "slightly more mature" person and said he was being driven by a desire "to be able to perform again", not the lure of sponsorship money.
"I'm not motivated by money," he said.
"If I was I wouldn't have stopped swimming, and especially going through the amount of training I have of late, my drive is performance."
Thorpe said his focus would be on the swimming the relay for Australia - an event in which he famously broke the American stranglehold and bagged gold at the Sydney 2000 Olympics - over both 100 and 200 metres.
Thorpe said he did not believe he had enough time to prepare for the 400 metres, his favourite event, but would instead train as a sprinter, something he said "may surprise a lot of people."
Thorpe plans to do most of his training in Abu Dhabi and Europe ahead of the London Olympic trials and acknowledged there was a long road ahead of him.
"It's big, it's enormous, but I'm prepared," he said, saying there were "things in swimming I haven't done and would like to achieve."
"I'm on track to be an elite swimmer again."
February 2011: Thorpedo set to launch himself at London 2012
January 2011: Ian Thorpe encouraged to make comeback for London 2012