Mr Walsh, 57, has led the company behind iconic brands such as Guinness, Smirnoff and Johnnie Walker since 2000.
Ivan Menezes will take over the position from July 1, though Mr Walsh will remain with Diageo for a year-long transition period before retiring, the company said.
His period in charge has seen a series of acquisitions and expansions into emerging markets, including the purchase of United Spirits, the Indian drinks conglomerate. It now sells to 180 countries.
The company has also pursued a strategy of buying drinks brands in Turkey, Brazil, China and Africa, while selling off non-drink businesses such as Burger King. But a bid to buy tequila giant Jose Cuervo stalled.
Last August Diago reported an overall rise in annual sales to £10.8 billion as profits surged. Sales have been hit by consumer weakness in Europe and other struggling economies recently but numbers have held up thanks to a strong performance in the US.
Diageo, which describes itself as the world's leading premium drinks business, employs 25,000 people around the world.
Mr Menezes, his successor, said: "Paul has made an extraordinary contribution to Diageo, and leaves a fantastic legacy."
Mr Walsh began his career with Grand Metropolitan in 1982. The drinks company merged with Guinness in 1997 to create Diageo. He said: "It has been a privilege to lead this great company. Diageo is one of the world's leading businesses, a position it has earned through the efforts of every one of its talented people."