He will be replaced by Jeremy Darrcoch, the current Sky finance director, who will take over as chief executive of BSkyB and will be the first chief executive to be appointed from within Sky.
In his new role, Murdoch will take control of his father's UK newspaper empire, which includes The Sun, the News of the World, The Times, The Sunday Times and thelondonpaper, as well as numerous continental and Asian media assets such as Sky Italia and the Star TV network in Asia.
The role will give Murdoch experience of running a growing global corporation, something he lacked prior to the move.
Murdoch will also take over from his father as non-executive chairman of BSkyB, where he is credited with doing a solid job during his four-year tenure.
Rupert Murdoch's decision to step down as chairman and as a director of BSkyB breaks his formal link with a company that almost led him to bankruptcy in the late eighties.
Under James Murdoch, BSkyB experienced a boost in subscriber numbers, when most were predicting a downturn, and successfully expanded the company's reach into broadband. He has also broadened the brand's appeal and pushed its green credentials.
Rupert Murdoch said: "Sky is a special company with a deeply held belief that people benefit from increased choice. Today more customers are choosing Sky than ever before as the company strives to offer the best choice, quality and value in an expanding marketplace.
"This progress has been achieved by an accomplished executive team under the leadership of James and Jeremy. I am confident that they and their colleagues will continue to set the pace in our industry."
James Murdoch said: "The team at Sky has demonstrated the success that can be achieved with an appetite for change and a single-minded focus on customers.
"I am pleased to have the opportunity to become non-executive chairman and I look forward to supporting Jeremy in his role as chief executive. Sky's transformation is progressing well and both Jeremy and I are committed to seeing it through."
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