Heavy losses in revenue drove the decision to close the seven days a week paper, which is 174 years old and has a daily circulation of nearly 45,000 copies.
It is owned by Conde Nast dynasty the Newhouse family through a company called Advance Publications.
It is not yet known how many of the 272 production and printing plant staff will transfer to the new company, named AnnArbor.com, but staff were told job losses were "inevitable".
The plans envisage an Ann Arbor News print edition being published on Thursday and Sunday and a total market coverage advertising supplement produced weekly.
The company's new online business model will be "built on the web's distribution and community engagement advantages".
Matt Kraner, who has been named president and chief executive of AnnArbor.com, said Ann Arbor residents have "the skills and technology set-up to receive and engage with online news".
Kraner said: "We will be working with Ann Arbor's residents and advertisers to build a unique and innovative community news and information service."
A statement from the owners said: "The new company will pair digital reporting from local journalists with real-time engagement, discussion and contribution from the local community via social networking features."
Community forums are being held in April to garner local opinion.
Laurel Champion, publisher of The Ann Arbor News who now becomes executive vice president of AnnArbor.com, said: "The Ann Arbor News was struggling as a daily print newspaper, with steep losses in 2008.
"At the same time the demand for local news and information in a wired community has never been stronger."
The news comes as Christian Science Monitor and the Seattle Post-Intelligencer both ditch print editions in favour of online-only news.
Letter From the Publisher
This is a difficult day for all of us at The Ann Arbor News. I've announced to my colleagues here that we will publish our last edition in July, when a new company called AnnArbor.com LLC will begin sharing local news and information with the community.
I don't have to tell you what a special and unique place Ann Arbor is -- we get to embrace and experience our community's vibrancy daily.
Our company knows that, too, and has chosen our special city to use as a laboratory to create new ways to share local news and information.
Our owners have decided to continue to invest significantly in our market, and will be starting a new online media company to better service our tech-savvy readers and advertisers.
In July, AnnArbor.com will be born as an incredible community resource online, in print and around town.
Like Ann Arbor, it will be a special place for everyone in the community to learn about, participate in and share everything that's going on in our area.
We have shared with you before in our pages the extreme challenges that our industry and our newspaper have faced over the last couple years.
Out of those challenges has come a new opportunity. Our new strategy reflects shifting media consumption habits and advertising revenue in the newspaper business, and particularly in Michigan.
As we say hello to AnnArbor.com, we will say good-bye to The Ann Arbor News. When we launch AnnArbor.com, our community website will be complemented with a new print product two days a week, Thursday and Sunday, as well as a total market coverage product.
In the interim, we will continue to publish our print newspaper seven days a week and share our news and information on our affiliate, mlive.com/ann-arbor.
We have studied readers' habits and the market closely, and you won't be surprised to know that Ann Arbor is uniquely well-suited to an online business model.
In fact, 92% of the community has the skills and technology set-up for online news. And, we're committed to working with everyone in the community, especially those who have limited online access and familiarity.
We'll be building our new product from ground up in Ann Arbor, and we're excited to work with you to help shape the design and features that will best serve our community and advertisers.
While we are inviting current Ann Arbor News employees to apply for positions with the new company, it is with a heavy heart that I let you know that job losses will be unavoidable.
We have an extremely talented staff at The Ann Arbor News and they have done a tremendous job through very difficult times. There is nothing they did or didn't do that would have sustained our seven-day print business model.
Along with the community, the architects of the new products will be Matt Kraner formerly of the Cleveland Plain Dealer, Tony Dearing of the Flint Journal, and me.
Matt will lead AnnArbor.com. Most recently, he had overall responsibility for circulation, advertising, marketing and prepress as CMO of the Cleveland Plain Dealer, Ohio's largest newspaper.
Previously, he was general manager of the St. Louis Post-Dispatch and Vice President of advertising at the Kansas City Star.
Many of you may remember Tony, who worked at The Ann Arbor News for 11 years, serving as business editor and later as managing editor. He left us in 1999 to become editor of The Bay City Times, and most recently was editor of The Flint Journal. He still has many ties to Ann Arbor, and his son, Adam, is a senior at the University of Michigan.
We hope you will embrace this change with us and help us along this journey to shape our new online media company.
I'd like to invite you to share your thoughts and ideas with Matt, Tony and me at our first community forums at 2 p.m. April 2 at Campus Inn, and at 10 a.m. April 3 at Weber's Inn.
Those will be the first of what we hope will be an ongoing community conversation. Before then, you will see enhanced reporting on our affiliate, mlive.com/ann-arbor, and we'll be able to answer your questions about the new company at www.AnnArbor.com.