"Nick Diaz vs GSP is on!" Cesar Gracie, Diaz's head coach, tweeted Friday.
The fight is expected to happen in Montreal in March with the card expected to be UFC 158.
UFC president Dana White confirmed this week that the Bell Centre show will also feature a rematch between Canadian welterweight Rory (Ares) MacDonald and Carlos (Natural Born Killer) Condit.
St-Pierre and MacDonald train together at Montreal's Tristar gym.
St-Pierre, the UFC welterweight champion, had asked to meet Diaz next, citing unfinished business. The two were slated to meet in October 2011 but the UFC yanked Diaz for failing to show up for a pair of news conferences.
Diaz was originally replaced by Condit but St-Pierre injured his knee in training. Condit then beat Diaz in February for the interim title, earning the right to meet the Canadian champion in Montreal last month.
St-Pierre won by unanimous decision.
St-Pierre (23-2) has put a proposed super-fight with Anderson Silva to the side to face Diaz.
UFC president Dana White said last week in Seattle that the GSP-Diaz fight would happen this time, presuming Diaz agreed.
Whit said GSP told him "Me and Nick Diaz have unfinished business. We were supposed to fight. That's the fight that I want.'
Diaz (27-8-1) was hit with a one-year suspension after the Condit fight for testing positive for marijuana.
A GSP-Diaz fight is bad news for contender Johny (Bigg Rigg) Hendricks, who thought he had the next title shot after dispatching Martin (The Hitman) Kampmann, Josh Koscheck and Jon Fitch in compiling a five-fight win streak.
Hendricks has accused St-Pierre of ducking him.