Google will maintain some of its best known business units, such as Search, Gmail, Android and YouTube.
The move is intended to create a simpler structure for what has become a diverse group of businesses, said Google cofounder Larry Page.
"This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google," he wrote in a surprise blogpost that was published after stock markets closed.
"Our company is operating well today, but we think we can make it cleaner and more accountable," he said.
The Silicon Valley internet giant has come under scrutiny for using its search engine profits to expand into new areas like autonomous vehicles, smart household devices, internet delivering hot air balloons and medical research.
Alphabet will be led by Larry Page, while Sundar Pichai, senior vice president at Google, will become the new Google CEO.
Sergey Brin, the other Google cofounder, will be president of Alphabet while the current Google chairman, Eric Schmidt, will be executive chairman of the holding company.
A Google employee in London told Techworld that the move was "so exciting".