The private equity group agreed to buy all outstanding Hilton shares for $47.50 each, a 32 percent premium over Tuesday's closing stock price.
The companies valued the deal at $26 billion including debt.
Hilton's board approved the terms Tuesday. The company said the deal would close in the fourth quarter pending shareholder approval.
"Our board of directors concluded that this transaction provides compelling value for our shareholders with a significant premium," Stephen F. Bollenbach, Hilton's co-chairman and chief executive, said in a statement.
The acquisition would take Beverly Hills-based Hilton Hotels private and boost Blackstone's portfolio of lodging properties. Blackstone owns more than 100,000 hotel rooms in the United States and Europe, including La Quinta Inns and Suites as well as LXR Luxury Resorts and Hotels.
Hilton Hotels owns or operates 2,800 hotels and 480,000 rooms in 76 countries and territories and includes such brands as Doubletree, Embassy Suites and Hampton Inn.
Among Hilton's premier hotels is the Waldorf-Astoria in New York.
Blackstone said it intends to invest heavily in Hilton and does not foresee any significant divestitures.
"It is hard to imagine a better strategic fit for us than Hilton with its world-class people, brands and network of hotels," said Jonathan Gray, senior managing director at Blackstone. "We are committed to investing in the company and working with Hilton's outstanding owners and franchisees to continue to grow and enhance the business."
Hilton recently announced that Matthew J. Hart, the company's president and chief operating officer, would succeed Bollenbach as president and CEO effective Jan. 1, 2008. It was unclear whether Hart would remain with the company after the acquisition.
"Blackstone likes the management here," Bollenbach told The Associated Press. "Matt continues to be COO and our plans remain the same."
Hilton has been aggressively expanding since 2005, when it bought Britain's Hilton Group PLC for $5.7 billion cash, reuniting two brands that split in the 1960s. The deal allowed Hilton, which had been limited to properties in the U.S. and Canada, to become a global player.
In 2006, Hilton's revenue nearly doubled to $8.16 billion, and net income climbed 24 percent.
The company had raised its 2007 estimates for per-room revenue, a key industry measure, in a sign that its expansion plans were being matched by increased worldwide demand.
Hilton's expansion plans, especially in new territories such as India, and the steady stream of fees the company gets for managing franchised properties worldwide, proved attractive to Blackstone, said Jonathan Galaviz, a partner at Globalysis Ltd., a Las Vegas-based consultancy.
"Blackstone feels those type of international expansion plans bode well for the long-term viability of Hilton as an asset," Galaviz said.
"I would expect to see continuing interest from private equity in travel and leisure sector assets as consumer disposable income increases in places like China and India and baby boomers here shift to the leisure part of their lives," he said.
The deal was praised by hotel workers union UNITE HERE.
"We enjoy a positive partnership with Hilton Hotels," union president Bruce Raynor said.
"Blackstone has demonstrated its commitment to fair treatment for thousands of hotel workers in several major markets," he added. "This combination is good news for the workers of what will be the largest hotel owner in the world."
Hilton shares rose $2.18, or 6.4 percent, to $36.05 Tuesday in trading shortened ahead of the July Fourth holiday.
Blackstone shares rose 45 cents, or 1.5 percent, to $29.72. The buyout shop sold a stake in its management partnership in an initial public offering late last month.