The fearless flanker is out of contract in the summer and has already been linked with several big-spending French clubs.
And the Dragons have confirmed the Welsh star will quit the region to join an undisclosed European team.
"We are obviously very disappointed that Danny has decided to leave the Dragons," said Dragons director of rugby Robert Beale.
"He has been a key part of our set up for several years and is popular with both the players and the coaches.
"I can assure our supporters that we did all that we could to retain Dan's services but we simply cannot compete with the offers which have been put on the table."
Lydiate , who made his Dragons debut in 2006 and overcame a career-threatening neck injury the following year, has established himself as a Wales regular and has won 27-caps.
He put himself in the frame for Lions selection with a stellar season in 2011-2012. The 24-year-old was named 2012 Six
Nations Player of the Championship and is seen as a front-runner for the 2013 tour of Australia.
Lydiate is currently sidelined after fracturing his ankle against Edinburgh in September but is expected to return to action in February.
The Dragons star appears to be the latest Welsh international to join the exodus abroad.
Welsh Lions James Hook, Lee Byrne, Mike Phillips and Gethin Jenkins already ply their trade in France's Top 14 and 2009 Lions Man of the Series Jamie Roberts is also set to cross the Channel.