The news gives Capital one year's grace in which to find a successor to the hugely popular Tarrant, who will launch the new breakfast show in January 2003. When news first emerged that Tarrant might no longer present the morning show, Capital's shares dipped by 11%.
Capital refused to disclose the terms of the contract that has convinced Tarrant to continue keep getting up so early in the morning.
Tarrant always had a contract that tied him to Capital until the end of 2003, but not necessarily at the breakfast show. There was speculation that he would stop doing this slot and had indicated so in recent newspaper interviews.
Tarrant said: "I just can't help it, radio is in my blood and so is Capital. I'm sorry to disappoint the competition, but I am not ready to hang up the Capital headphones yet."
Breakfast is a prime advertising period for radio, and analysts speculated that Tarrant's departure could have pushed revenues at the station down as much as 3%.
The station has not unveiled details of the new show, which was already being planned when Tarrant's departure became a possibility over the last two months. However, it is likely that the show will pave the way for his successor.
Capital has the biggest share (48%) of Londoners aged between 15 and 24 years old. Overall, it has a 10.3% share of the London audience, but this rises to 12% during Tarrant's 6am-10am show.
David Mansfield, group chief executive, said: "We have been discussing a number of programming ideas with Chris and we are both delighted that he will be launching the station's new breakfast show in its first year."
Shares were trading up 7.07% to 487.5p this morning, a rise of 32.5p.
This morning, Capital, which also owns alternative music station Xfm, said like-for-like revenues for the year to September will be down 2% on last year and that it continues to be cautious regarding the outlook for advertising for the remainder of 2002.
The 2% fall is a result of a much larger fall earlier this year, when Capital reported that like-for-like radio revenues were down 7% in the six months to March 31, according to a trading statement issued this morning.
More encouragingly, Capital said that like-for-like radio revenues will be up 2% for the six months to September 30.
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