The Congress for Freedom and Democracy in Kurdistan (KADEK), formerly known as the Kurdistan Workers' Party (PKK), said on the Tuesday the new body would try to negotiate a peaceful settlement.
"KADEK is being dissolved in order to make way for a new, more democratic organisational structure that allows for broader participation," it said in a statement issued in Baghdad.
Turkey, however, reacted unfavourably to the disbanding, saying it was just a ploy to improve the outlawed organisation's image.
Meanwhile, Iranian security forces have arrested a member of KADEK from near its northwestern border with Turkey.
The Shargh paper quoted Abbas Khorshidi, a deputy governor general in charge of security for Iran's Western Azerbaijan province, as saying the man had been in detention for the past week.
The man, arrested in the city of Orumiyeh, was not identified.
There are more than 30 million ethnic Kurds scattered across a wide area of the Middle East that includes eastern Turkey, northern Syria, northern Iraq and northwestern Iran
History of struggle
The PKK was founded in 1974 as a Marxist-Leninist insurgent group mainly composed of Turkish Kurds. Its aim was to establish an independent, democratic Kurdish state in the Middle East.
In the early 1990s, the PKK moved beyond fighting in rural areas to include urban attacks.
Turkish authorities captured its leader, Abdullah Ocalan, in Kenya in early 1999. Turkey's State Security Court sentenced him to death but the order has not been carried out. In August 1999, Ocalan urged his comrades to abandon the armed struggle.
The PKK declared it would pursue its aims by peaceful means in 2000 and reorganised as KADEK in 2002. However, it has retained an armed wing in case of "self-defence".