The deal, which was highly anticipated, ensures Mercedes will continue to provide power units to three customer teams in 2015, following McLaren's impending switch to Honda.
Lotus, who join Williams and Force India as Mercedes customers, will also switch to using Petronas fuel under the terms of the agreement, although the team will continue to manufacture their own transmission in Enstone where work is already underway on the team’s 2015 car, dubbed the E23 Hybrid.
"We are pleased to have been chosen by Mercedes AMG High Performance Powertrains in a significant long term deal," said Matthew Carter, CEO of the Lotus F1 Team. "We intend to return to the front of the field with the goals of winning Grands Prix and being a strong championship contender once more and we see this new agreement as one step towards this aim.
"The Mercedes-Benz power unit has shown good performance on track and it is our goal to marry this motive force to Enstone's chassis expertise. It is our desire that the E23 Hybrid, powered by Mercedes-Benz, heralds a new era of success for Enstone.
"At this juncture we would also like to thank Renault, who have been so closely associated with the team over its history and for the joint success we have achieved together."
Toto Wolff, head of Mercedes-Benz Motorsport, added: "It was strategically important for Mercedes-Benz to continue to supply three customers throughout this generation of power unit, in addition to the primary focus on our Silver Arrows works team, and it was therefore clear that we would be looking for a new customer from 2015.
"Lotus F1 Team is an impressive organisation that has delivered competitive on-track performances in recent seasons. We are pleased to welcome them to the Mercedes-Benz family and look forward to building a productive and performant working relationship in the years ahead."
Lotus's collaboration with Mercedes will run until the end of the current power unit regulations, which were introduced ahead of the 2014 season.