The production is expected to premiere in late 2015
Cameron's film, released in 2009, featured a range of pioneering 3D techniques and is the highest-grossing cinema release to date.
Cirque du Soleil, who have previously created shows based on the music of Michael Jackson and The Beatles, are aiming to tour the Avatar show in late 2015.
Cameron said: "Over the years, I have discovered the extraordinary talents and imaginations of both the artists and the creative forces behind Cirque du Soleil. I know we share the common goal of bringing audiences to another level of entertainment experiences. I look forward to doing just that on this project."
It's official! @cirque & @JimCameron will develop #AVATAR live-touring show! #C2MTL pic.twitter.com/cBft0pGcrP
— Cirque du Soleil (@Cirque) May 29, 2014
Avatar is a futuristic thriller set on a distant moon where the mining operations of humans are threatening the habitat of local tribe the Na'vi.
Twentieth Century Fox, which financed Avatar and its upcoming three sequels, will act as a partner on the live show, according to Variety.
The company's chairman Jim Gianopulos said: "Avatar remains a phenomenon that continues to inspire people around the globe, and combining it with the live event ingenuity of Cirque de Soleil is a perfect synthesis of imagination and talent."
Cirque du Soleil will be in London next week when its show Dralion opens at the O2 Arena on 4 June.