Leahy helped transform Tesco into Britain's biggest retailer while also overseeing a massive expansion abroad.
Following Tuesday's announcement, Tesco's share price was the biggest faller in early trade on London's benchmark FTSE 100 index, with a drop of 1.51% to 400.95 pence.
"Sir Terry Leahy has decided, after an outstanding career at Tesco, to retire in March 2011 at the age of 55 after 14 years as CEO," a company statement said.
"The Tesco Board has moved to implement its long-term succession plan, with Philip Clarke succeeding Sir Terry."
Leahy said he felt his task of turning around Tesco was "almost complete".
He said in the statement: "When I became CEO I had a plan to build Tesco around its customers, to make it number one in the UK and to find new long-term growth in non-food, in services and in international expansion.
"I wanted to develop a purpose and values that could sustain Tesco through its challenges and encourage and grow future leaders. It has taken 14 years but that strategy has become a firm reality now and so I feel my work is almost complete."
Tesco chairman David Reid described Leahy as "undoubtedly one of the leading businessmen of his generation" who "has put in place a strategy which can secure the progress of Tesco for years to come".
Leahy's replacement Clarke has meanwhile worked at Tesco throughout his career spending many years in retail and commercial, according to the group.
The 50 year-old joined the Tesco board in 1998 and is currently responsible for the group's operations in Asia and Europe as well as its IT unit.
Source: AFP
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