Rousey announced the matchup Friday on ABC's "Good Morning America." The 135-pound title fight will headline UFC 195 at the MGM Grand Garden Arena.
The news comes as a bit of a surprise, as UFC president Dana White had previously stated Rousey's next defense would be a trilogy bout against Miesha Tate.
Holm, 33, had also hinted she needed more time to prepare for a title opportunity.
"She's the most decorated striker we have in all of mixed martial arts," Rousey said of Holm. "Definitely my biggest challenge to date. I'm super excited about it."
Rousey later added: "She's not the average chick I would fight. She's the best striker I've ever fought, and striking is something I learned much later in my career."
Holm said her style will present a challenge that Rousey has never dealt with before.
"My initial reaction was, 'I can do this. I can do this. I can make this happen,'" Holm told ESPN.com. "It's just going to be a lot of work. I just need to focus on preparing myself."
As expected, Rousey has opened a massive betting favorite over Holm. Initial odds, set by Nick Kalikas of MMAOddsBreaker.com, pegged Rousey a minus-1450 favorite to win, which translates to a 93.55 percent implied probability. Holm is listed at plus-950. Rousey would have been a minus-1200 favorite in a fight against Tate.
Rousey (12-0) is coming off a 34-second knockout over Bethe Correia at UFC 190 on Aug. 1 in Rio de Janeiro. A U.S. bronze medalist in judo in the 2008 Olympics, Rousey has finished all but one of her professional fights inside one round. She set the UFC record for quickest finish in a title fight earlier this year, when she submitted Cat Zingano via armbar in just 14 seconds at UFC 184.
Including another quick win over Alexis Davis, Rousey has beaten her past three opponents in a combined 1 minute, 4 seconds.
"I don't ever expect the fights to be easy and fast," Rousey said. "A lot of the guys you see, the first round is more of a feel-out period, and they're both kind of sizing them up and taking their time.
"There's no feel-out period for my fights. It starts right away. You don't know what's going to happen, and the first exchange is the most dangerous."
After her most recent win, Rousey discussed Tate (17-5) as her next opponent. Tate is on a four-fight win streak but has suffered two prior defeats to Rousey in 2012 and 2013. Both losses came via armbar.
"I don't even want to be in that position in a fight. And I don't want to get caught up too much in one angle of the fight," Holm said of preparing for the armbar. "That's one thing that's different from boxing, there are so many different angles when it comes to how a fight can pan out."
Holm (9-0), who was Ring Magazine's Female Fighter of the Year in 2005 and 2006, officially ended an 11-year professional boxing career in 2013 to focus solely on mixed martial arts. Fighting out of Jackson-Winkeljohn MMA in Albuquerque, New Mexico, Holm has recorded a knockout in six of her nine wins.
She signed with the UFC last year, eventually making her promotional debut in the co-main event of Rousey's title defense against Zingano. Holm is 2-0 in the Octagon, with decision wins against Raquel Pennington and Marion Reneau. As a pro boxer, Holm compiled a 33-2-3 record with nine knockouts.
"I always visualize knockouts. And I visualize them in different ways," Holm said. "I never put it in my mind that's what is for sure going to happen, because I feel like if I say, 'I'm going to knock her out in Round 3,' well, if that doesn't happen, then I'm not ready to fight rounds 4 or 5. I train for the full fight. That definitely could be the way it goes."
In kickboxing, Holm also won an IKF welterweight championship in 2001.
When asked about her prospects of beating Holm, Rousey pulled no punches.
"I can take anybody," Rousey said. "I prepare for a five-round war every time I get in there. No one's easy until you beat them. Holly Holm is the type ready to go 12 boxing rounds."
Calls for Rousey to fight Invicta FC featherweight champion Cris "Cyborg" Justino (14-1) have been loud this month, as the consensus Nos. 1 and 2 female fighters in the world each recorded sub-minute knockouts this summer.
The UFC has stood fast by its demand that Justino, who fights at 145 pounds, cut to the bantamweight limit. The UFC does not currently promote a featherweight division.