Alton will be replaced by John Mulholland, deputy editor of the Observer since 1998.
Alton, who has been in the role for nearly a decade, said: "The Observer is in fantastic shape, editorially and commercially, and this is the right time for me now to be handing over to John. I am absolutely thrilled at his appointment."
During Alton's tenure as Observer editor he has overseen a number of major changes to the paper including the move to the Berliner format.
Following the move to the new format, the Observer was named Newspaper of the Year at this year's British Press Awards. Alton has also presided over the introduction of a range of acclaimed magazine supplements such as Observer Sport Monthly.
The Scott Trust, which owns the Guardian and the Observer, said Alton led the paper through a "period of sustained circulation and innovation".
Alton, who has twice been named editor of the year, joined the Observer from the Guardian, where he had spent more than 20 years in roles including features editor and assistant editor.
Mulholland said: " I, along with the superb team at The Observer, will be doing my utmost to carry on the wonderful work that Roger has done and to ensure that a paper with such a unique and cherished history continues to produce journalism that we can all be proud of in the future."
The announcement coincides with rising speculation there is a feud between the Observer and the Guardian, linked to their opposing stances on the war in Iraq. The Observer supported the war in Iraq, while the Guardian did not.
However, according to other reports, tensions between the sister titles have more to do with unease about the eventual integration between print and web.
According to the latest ABC figures, the Observer reported the biggest monthly circulation rise in the quality market during September, with its month-on-month figure up 6.69% to 472,252 copies.
But its six-month average figure is down by 1.94% to 454,578 copies.
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