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Khan, who won a silver medal in 2004, confirmed on Twitter that his team had agreed to Pacquiao's terms and would meet him for a "super fight."
Pacquiao and Khan are no strangers to one another: They were both trained together by Freddie Roach.
In mid-February, Pacquiao asked his Twitter followers who he should fight "next in the UAE" -- Khan was the overwhelming favorite, winning 48% of the votes cast.
It has not yet been disclosed where the fight will take place.
Khan's last fight was in April last year, when Mexican Saul "Canelo" Alvarez knocked him out with a massive blow.
Boxer or senator?
"Politics, to me, is a vocation not a means to eke out a living," Pacquiao said in the statement.
Pacquiao is a firm political ally of Philippines president Rodrigo Duterte, and has often been discussed as a future presidential candidate.