The new grouping would be called the Popular Party for Freedom and Direct Democracy, or the FDDV by its German acronym, movement head Lutz Bachmann said at a meeting in Dresden, Pegida's eastern stronghold.
Bachmann – convicted and fined in May for inciting racial hatred by branding refugees “cattle” and “scum” on social media – insisted he did not intend to stand for the leadership.
The move to form a party comes with authorities mulling a ban for the original association which spawned Pegida over fears of growing extremism.
Bachmann insisted the new party would not seek to overshadow the Alternative for Germany (AfD), which has polled at more than 10 percent support in recent months.
The AfD was founded as a eurosceptic protest party in 2013 but now mainly rails against Islam and Germany's openness to refugees, which last year brought more than one million asylum seekers to Europe's top economy.
“We shall support the AfD in the next elections [scheduled for 2017] and shall only field candidates in a limited number of constituencies,” Bachmann said.
He added that relations between the two far-right movements were mostly good and that “only together” could they serve their mutual cause.
Cracks in the AfD have emerged in recent months, with a leadership split deepening after a row over anti-Semitic comments by one of the party's lawmakers, who labelled Holocaust deniers “dissidents”.
There are also differences within the AfD on whether to embrace Pegida or keep the movement at arm's length.