Transport for London (TfL) will upgrade its smartcard system to accept contactless payment via debit or credit cards by the end of 2012.
This system will be used on all 8000 buses before the Olympic Games, and the Tube, the Docklands Light Railway and the London Overground network will be upgraded later in the year.
Currently passengers have to either buy a ticket or update their Oyster cards. With the contactless system money will be directly debited from the user's account.
"It is tip-top news that from next year a simple tap of a contactless bank card will be enough to whizz you from A to B in the city," said mayor of London Boris Johnson.
"London leads the way in so many different fields and we will be the first in the world to allow the millions using our Tube, trams, buses and trains to benefit from this technology."
To roll this out, TfL will upgrade the current Oyster smartcard system software to recognise contactless credit and debit cards issued by Visa, MasterCard and American Express.
TfL said the software upgrade would be fully approved by the payment schemes, and make full use of the payment industry's security systems.
Certain features of contactless payments will be adapted to suit the public transport environment, meaning customers will not have to enter a PIN at a busy station's barriers.
TfL hopes this will encourage tourism and make it easier for overseas guests, as even if a card was issued by an international bank, it will work instantly on the new system provided the user has the technology in the card.
"People will no longer be caught out after accidentally leaving their Oyster at home or have to queue to top up their Oyster card ahead of travel," said Mark Austin, vice president and head of Visa contactless.
"The fact that international visitors will be able to use their Visa debit and credit cards to travel when visiting the capital is great for London as a tourist destination, and shows the potential for this system to be implemented to transport systems across the world."
TfL is also in talks with the train-operating companies that serve London about whether or not this technology could be used on National Rail services where Oyster is currently accepted.
The company has confirmed that once the system is rolled out, it will look into introducing daily and weekly price capping for customers using contactless payments.