Obama has said the past six years have left the US in a precarious place.
"Our leaders in Washington seem incapable of working together in a practical, commonsense way," Obama said in a video posted on his website.
"Politics has become so bitter and partisan, so gummed up by money and influence, that we can't tackle the big problems that demand solutions. And that's what we have to change first."
Youthful challenger
Despite serving only just over two years in the senate, his background, his opposition to the US-led invasion of Iraq and what has been described as a "fresh face" in US politics have added to his appeal.
Obama said: "I certainly didn't expect to find myself in this position a year ago. I've been struck by how hungry we all are for a different kind of politics."
Jim Demers, a lobbyist from New Hampshire who accompanied Obama on his visit to the state last month, said: "He [Obama] is extremely pumped and excited that this campaign is coming together."
Obama was born in Honolulu, Hawaii.
Obama opposition to the US-led invasion
of Iraq has added to his popularity [AP]
His father was Kenyan while his mother was from Kansas.
He graduated from Columbia University and Harvard Law School, where he was the first African-American to be elected editor of the Harvard Law Review.
In 1996, he was elected to the Illinois state senate, where he earned a reputation as "a liberal" on social and economic issues.
He has backed gay rights, abortion rights, gun control, universal health care and tax breaks for the poor.
Also running
Hillary Clinton, also a Democrat senator, is expected to announce her own presidential campaign in the next few days.
A spokesman for Clinton said there would be no comment from the Clinton camp on Obama's decision.
Other Democrats who have announced their campaigns or filed to set up exploratory committees are: John Edwards, a 2004 vice presidential nominee; Tom Vilsack, the former governor of Iowa; Chris Dodd, a Connecticut senator; and Dennis Kucinich, a representative from Ohio.
Senators John Kerry of Massachusetts, Joe Biden of Delaware, as well as Bill Richardson, New Mexico's governor, are also considering to run.