Congress led UPA has unanimously agreed to the formation of new state in southern Andhra Pradesh.
The state would comprise of 10 districts out of the total of 23 of Andhra Pradesh, with total population of 40 million.
Decision came as a result of 50 years of campaign for separate state.
The state witnessed protests for and against the formation of state in recent years.
Supporters claim the new state had been neglected by the government.
Opponents are unhappy for Hyderabad, home to many major information technology and pharmaceutical companies, would become Telangana's new capital.
"It wasn't an easy decision but now everyone has been heard and a decision has been taken," senior Congress leader Digvijaya Singh told media.
Congress party spokesman Ajay Maken said that Hyderabad would remain the common capital for the two states for a period of at least 10 years until Andhra Pradesh develops its own capital.
"A resolution was passed in the meeting where it was resolved to request the central government to take steps to form a separate state of Telangana," Mr Maken told a press conference.
He said that the resolution was cleared "after taking into account the chequered history of the demand for a separate state of Telangana since 1956".
The final decision on a new state lies with the Indian parliament. The state assembly too has to pass a resolution approving the creation new state.
Hundreds of paramilitary soldiers have been deployed in Andhra Pradesh to prevent any kind of violence arising out of Tuesday's announcement.
Some local Congress party members have opposed the split.
"We're swallowing the poison for our party. The decision is very unfortunate but since our leader has taken the decision we'll abide by it. We know the consequences, the problems that will follow," said Rudraraju Padma Raju, the Congress MLC from Andhra Pradesh.
It is believed that ruling party’s decision on new state formation is linked to general elections next year.
The last three new states – Chhatisgarh, Uttarakhand and Jharkhand- in India were formed in 2000.
Several parts of India - including the Bundelkhand region in the central state of Madhya Pradesh, Vidarbha in western Maharashtra state and Gorkhaland in the eastern West Bengal state - face similar statehood movements, but the government has not made any moves to create them.