Sources close to the bout confirmed the news to HeavyMMA.com on Friday night.
The bout had been rumored since a Twitter conversation between both fighters unfolded earlier this week. Both parties have agreed to the fight, and it is expected to be the co-main event for the pay per view broadcast.
UFC 137 is scheduled for Oct. 29 at the Mandalay Bay Events Center in Las Vegas. It features a headlining fight between welterweight champion Georges St-Pierre and Nick Diaz.
Condit is riding a four-win streak and is considered to be the next challenger in line for the welterweight title, but Condit elected to take another fight in 2011 instead of waiting for the winner of the St-Pierre/Diaz fight to emerge.
Penn was rumored to face Jon Fitch in a rematch of their UFC 127 battle, but fan interest in the rematch waned and UFC matchmaker Joe Silva elected to go a different route.
