To be called Tesco Mobile, the 50:50 joint venture will see Tesco pre-paid phones on the shelves later this year and available on Tesco.com in the run-up to Christmas.
Both firms will pump £8m each into the JV over the next two years.
Tesco boss Sir Terry Leahy said: “The service will be convenient. You'll be able to buy handsets in store or over the internet, and charges will be simple and clear."
Andy Dewhurst, previously boss of Tesco Personal Finance, will be chief executive of the new business.
Tesco Mobile will operate on a stand-alone basis and bear all its own subscriber acquisition costs. The service will employ 25 people and be based in Slough.