Peters’ decision, which came after the September 23 election ended deadlocked, gives her Labour Party the numbers to take office with his New Zealand First and the Greens.
“It is an absolute honour and a privilege to have the ability as Labour Party leader to form a government for all New Zealanders,” she told reporters, saying it was “an exciting day”.
Peters, who has been offered the deputy prime ministership under the deal, told reporters he believed Ardern offered change that could provide “capitalism with a human face”.
He added: “That’s why in the end we chose a coalition government of New Zealand First with the New Zealand Labour Party.”
The 72-year-old “kingmaker” was full of praise for Ardern, who revived Labour’s fortunes when she became party leader just weeks out from the election.
“She exhibited extraordinary talent in the campaign itself from a very hopeless position,” he said.
Once the Greens formally approve the coalition, Ardern will become New Zealand’s youngest leader since 1856 and only the third female prime minister of the nation of 4.6 million.
Ardern thanked Peters for his support, saying it was “a critical step to forming a Labour-led progressive government”.
She campaigned on issues such as housing affordability and free tertiary education. Environmental action and improved healthcare were also constant themes at the hustings.
The result was a bitter blow to outgoing conservative Prime Minister Bill English, who ran an unexpectedly strong campaign to claim 44.4 percent of the vote, far higher than Labour’s 36 percent.
He congratulated Ardern and said he had not yet decided whether he would remain National party leader in opposition.
It is the first time since New Zealand adopted proportional voting in 1996 that the party which claimed the largest slice of the vote has failed to form a government.
Peters had promised to reveal his choice on Thursday afternoon but had already missed several self-imposed deadlines to settle the issue.
– Down to the wire –
He stretched the announcement out as long as possible, appearing before reporters early in the afternoon to say he still had not made a decision.
“It’s seriously difficult because there are pros and cons for every part of this decision we’ve got to make,” he said.
He said the talks went down to the wire, with new information arriving throughout the day, finally addressing a media conference at 7:00pm (0600GMT).
Peters thrashed out policy positions over 12 days of negotiations and said he only made his decision 15 minutes before making it public.
He did not inform English or Ardern before the announcement, saying voters deserved to know first.
Peters refused to specify what concessions he received from Labour, while Ardern said policy positions and ministerial portfolios would be revealed next week.
The anti-immigration campaigners’ demands are expected to centre on issues such as cutting migrant numbers, banning foreign home buyers and boosting regional development.
Peters has been kingmaker in two previous elections, opting for National in 1996 in return for being made deputy prime minister and backing Labour in 2005 after it agreed to make him foreign minister.
But he did not see out either term of office as a minister, leading some observers to say any government that relies on Peters to prop it up is inherently unstable.
“I think it’s going to be a one-term government whichever way he goes,” former National Party minister Paul East told Radio New Zealand ahead of the announcement.
“It’ll be fractious and it won’t last.”