The ring is the stunning 18 carat blue sapphire and diamond ring his father, the Prince of Wales, gave his mother in February of 1981.
In an interview with Fox News, Diana’s former butler Paul Burrell said the ring will be introduced to a new generation through Kate Middleton.
"This was my way of making sure that my mother didn't miss out on today," William said as the couple posed for photographers inside St. James's Palace.
The wedding is set to take place next spring or summer in London. According to several reports, Prince William asked for Middleton’s hand in marriage while the two vacationed in Kenya.
William says he had been planning to pop the question for a while. But he says "as every guy out there will know, it takes time a certain amount of motivation to get yourself going."
The prince says "it just felt really right out in Africa and was beautiful at the time."
"Blimey," said William as he faced a torrent of camera flashes Tuesday at St. James's Palace. He wore a navy suit, Kate a simple blue dress.
Kate acknowledged that being queen was "a daunting prospect" and declined to say whether the prince had gone down on bended knee when he proposed. She later added that William's mother Diana was an inspirational woman and she would have loved to have met her.
Middleton’s family says they are absolutely thrilled at the engagement news of their daughter to Prince William.
"I would just like to say that Carole and I are absolutely delighted by today's announcement and thrilled by the prospect of a wedding sometime next year," Kate Middleton's father Michael Middleton said Tuesday.
"As you know Catherine and Prince William have been going out for quite a number of years, which is great for us because we have got to know William very well. We think he's wonderful and we're extremely fond of him."
Kate Middleton and Prince Williiam, both 28, have been dating for eight years. They met when they were both attending St. Andrews University in Scotland.
In 2002, William paid 200 pounds to sit in the front row at a charity fashion show where Middleton was modeling in a daring outfit -- they are thought to have started dating the following year.
A commoner rather than an aristocrat, Middleton is the daughter of self-made millionaires. Her father worked for an airline and her mother was a flight attendant before they started a mail-order business specializing in children's parties, run from their house in southern England.
She attended Marlborough College, an elite private school, where she played tennis and field hockey, before studying art history at St. Andrews.
Once the couple's relationship became public with a joint photo on a Swiss skiing holiday in 2004, Middleton became a media darling -- especially after both graduated, ending a media agreement to leave William alone while he was at university. With her confident good looks and long brown hair, Middleton became one of the most photographed women in Britain.
The brunette fashion buyer was photographed attending public events, going to work, even getting a parking ticket -- a level of attention that evoked the romance of William's parents, Charles and Diana.
Middleton was there when William was commissioned as a British Army officer after graduating from Sandhurst military college in 2006.
William was determined that Middleton would not suffer the same media hounding endured by his mother, who died in a Paris car crash in 1997. He appealed through his office for the media to leave her alone.
In 2007 Middleton filed a harassment complaint against a newspaper. She accepted an apology and admission of error from the Daily Mirror.
"Following the marriage, the couple will live in north Wales, where Prince William will continue to serve with the Royal Air Force."
William, second in line to the throne, is an RAF search and rescue pilot.
The Associated Press contributed to this report.