Mr Sutton will be replaced by Labour's next list candidate, Wellington lawyer Charles Chauvel.
In December, Mr Sutton said he intended to resign once it became clear whether the World Trade Organisation's Doha Round of talks would succeed or falter.
Those talks are now deadlocked, with only a slim chance of success.
His retirement will take effect on July 31.
From August 1 he will take up two new roles – as a roving trade ambassador and chairman of state entity Landcorp.
Mr Sutton was Trade Negotiations Minister until last year's election.
He did not seek re-election to Cabinet after receiving a thumping in his Aoraki electorate and learning he no longer had the support of Miss Clark or enough colleagues to succeed.
Miss Clark has publicly said she wanted some long-serving MPs to retire to help regenerate the Labour Party.
She previously tried to lure Mr Sutton out of politics with the promise of plum diplomatic posts.
Mr Sutton refused, as he wished to remain in New Zealand, where his partner Trish Ranstead is based.
But he said last year he would be delighted to take on a trade envoy role that would enable him to use his extensive political networks to push New Zealand's case.
His appointment will please key business and farming figures who were surprised and unhappy with Mr Sutton's demise, after the excellent progress he had made in his six years in the job.
The new job is expected to take up about half his time.
Mr Sutton, a farmer, first entered Parliament in 1984 as Labour's MP for Waitaki. He lost his seat in 1990 but returned in 1993 as the MP for Timaru.
He was briefly the Minister of Agriculture and Forestry in 1990 before Labour lost that year's election.
Since 1999 he has held portfolios in the areas of trade, agriculture, rural affairs and biosecurity.
He has won wide respect for his trade negotiations work, but was pilloried by farmers over proposals to allow greater access for walkers across their land.
The Government was forced to back down on the proposal ahead of last year's election.
Miss Clark today paid tribute to Mr Sutton who she said had always been a staunch advocate for rural communities.
"Jim is one of Parliament's most respected figures. His contribution has been significant and the government is keen to see it continue at senior levels."
She said a major achievement was overseeing the formation of New Zealand's largest company, Fonterra, and the completion of trade deals with Singapore, Thailand, Brunei and Chile.
During his tenure as trade negotiations minister, New Zealand had also entered free trade negotiations with China, becoming the first developed nation to do so.
"Jim's intelligence, skills, integrity, and hard work also helped maintain New Zealand's reputation as an influential player in multilateral trade negotiations. . . such as the World Trade Organisation," Miss Clark said.
His appointment as trade ambassador for two years would allow him to use his contacts to support bilateral and regional negotiations.
His appointment to Landcorp would allow him to draw on his farming, business and government experience, Miss Clark said.
Mr Sutton's replacement, Mr Chauvel, was Labour's Ohariu-Belmont candidate at the last election.
He is a partner in law firm Minter Ellison, as well as a former chairman of the New Zealand Aids Foundation and director of Meridian Energy and the Lottery Commission.
He is openly gay and is a member of Labour's gay and lesbian group Rainbow Labour.