The company has been interested in some time in unloading weaker decisions, especially those that do not fit into Kraft's main interests in cheese, neat, convenient meals and snacks.
In the deal shareholders will receive $1.6bn worth of stock in Ralcorp, giving them a 54 per cent holding in Ralcorp, a private label and frozen bakery company.
The deal would be done either as a spin-off or split-off transaction, Kraft said.
Kraft will also receive $960m of cash-equivalents.
The transaction is worth $2.6bn in total, Kraft said, adding that the company would have had to sell the division for $4bn to give its shareholders the same deal after tax.
"This is a transaction where everyone wins - Kraft, Ralcorp, our respective shareholders and employees," said chief executive officer Irene Rosenfeld.
The companies plan to complete the transation by mid-2008, after shareholder and regulatory approvals.
The Post business, which sells the cereals Honey Bunches of Oats, Pebbles, Shredded Wheat, Grape Nuts and Honeycomb in the US, had net revenues of about $1.1bn in 2006.
Rumours of Kraft selling the division started circulating this summer, when activist investor Nelson Peltz bought a three per cent stake in the company.
In August, the Wall Street Journal also speculated Kraft was under pressure from the double whammy of high cereal prices and strict legislation on advertising to children.
Kraft Foods is currently one of the world's largest food and beverage companies, with global revenues of $34bn (€25bn).
Last week, the European Commission approved Kraft's acquisition of France-based Danone biscuits, one of the biggest snack companies operating in the EU.
With the acquisition, Kraft will also gain access to critical emerging markets such as China, Russia, Poland, Indonesia and Malaysia, which will account for 25 per cent of business.
The company will also establish footholds in Malaysia and Indonesia.