Mustafa al-Barghuthi, a physician educated in Russia and the US, will challenge frontrunner Mahmud Abbas.
Abbas, the new head of the Palestine Liberation Organisation, was chosen by the dominant Fatah movement to run in the 9 January poll.
Al-Barghuthi shares a family name with jailed Palestinian leader Marwan al-Barghuthi but is not closely related. Marwan al-Barghuthi dropped his potential bid for the presidency after
Fatah leaders feared his candidacy could split the group.
Mustafa al-Barghuthi joins a handful of candidates in the race to succeed Arafat, who died in Paris on 11 November. He failed to win a seat in Palestinian legislative elections in 1996.
Demand for change
"What we need is a strong, democratic opposition candidate ... We need reform. We need democracy," al-Barghuthi said on Saturday, adding he would officially announce his candidacy on Monday.
"Enough is enough. We have been dragged into so many tunnels without hope. I think everything will depend on the vote of the young people ... I think there is a huge demand for change."
Fatah candidate Abbas is tipped
to win the presidential election
Abbas, 69, is favoured as a future peacemaker by Israel and the US. His defeat could deal a blow to any international effort to revive violence-stalled peace efforts.
Al-Barghuthi is a founder of the Palestinian National Initiative, which he formed with a group of intellectuals in 2002 to spur democratic reform and better social services.
Al-Barghuthi supports peace with Israel based on two states with a Palestinian state in all territory occupied by Israel in the 1967 Middle East war, a capital in Arab East Jerusalem and
rights for refugees.
He was one of the delegates at the 1991 Madrid peace conference and is also a founder of the Palestinian Medical Relief Committee.
He said he was wounded in 1996 when he was shot by the Israeli army while acting as a medic, and was briefly arrested in 2002 for entering Arab East Jerusalem from the West Bank
without a permit.
Palestinians held their first elections in 1996 when Arafat was elected president, beating out a lone independent challenger who ran a non-governmental organisation.