The deal with Rheinmetall BAE Systems Land (RBSL) will see 148 of the service's existing Challenger 2 main battle tanks upgraded to Challenger 3s.
The Ministry of Defence is predicting the new vehicle will be the "most lethal tank in Europe".
The tank is expected to achieve initial operating capability by 2027, with the aim for it to be then fully operational by 2030.
The remaining Challenger 2s not receiving upgrades will be retired.
"This represents a huge shift in the modernisation of our land forces through the increased lethality of Challenger 3," the Defence Secretary Ben Wallace said, speaking as further details about the upgrade were announced.
What will the new battle tank be able to do?
The Challenger 3 tanks will be fully digitised, with a top speed of 60mph.
The fleet will have high-velocity ammunition that can travel at faster speeds, as well as an increased range.
New technology will be used to programme ammunition from a new turret with a 120mm smoothbore gun.
The tank will also feature a new automatic target detection and tracking system and an upgraded engine with a new cooling system and suspension.
Thermal long-range cameras will be also fitted as part of a day/night image system for the vehicle.
A 'far more integrated vehicle'
The decision on the Army's Challenger 2 fleet was announced in March's Defence Command Paper, a report which confirmed the futures of other vehicles in the service, including the cancellation of a long-planned Warrior upgrade.
Talking about what the Challenger 3 will offer the UK, the Defence Secretary said: "This pioneering new technology allows us to deliver immense warfighting capabilities in battlespaces filled with a range of enemy threats."
Mr Wallace, who himself is a former British Army officer, told Forces News: "What you will see is a far more integrated vehicle.
"It won't just be a vehicle on its own, it will be a vehicle that will be able to queue targets, talk to other parts of the battlefield in a way that, in my day, would have all gone back to a brigade through a battalion headquarters."
He said a "fuller picture" of the battlefield will be a force multiplier for those operating the Challenger 3, who will also benefit from a more lethal tank.
Asked whether a force of 148 Challenger 3s will be credible in a modern context, Mr Wallace said it would be "credible to deliver an armoured brigade when you need it, at the time you need it".
The Deputy Chief of the General Staff, Lieutenant General Chris Tickell, said the Integrated Review's findings offered "a huge amount of opportunity" and "left the Army in a good place."
"The integration of Challenger 3 is key to ensure our success and integration in the land domain, ensuring that we meet our international commitments and continue to protect the nation," he added.
He told Forces News that a greater data sharing capability will allow commanders "to identify the enemy" and "move that information seamlessly to other platforms".
Director Land Equipment for Defence Equipment & Support (DE&S) Major General Darren Crook described the announcement as a "significant step forward for defence and UK industry".
Watch: Prior to Friday's announcement, we asked a land warfare expert about what the Challenger 3 needs to offer the Army.