Only Woody Allen (2002), Clint Eastwood (2009) and Bernardo Bertolucci (2011) have previously been honoured this way, according to festival organisers.
The prize is given to a renowned director who has had "a global impact", but has not won a Palme d'Or before.
The festival starts on 13 May, with Joel and Ethan Coen chairing the jury.
Varda, 86, was one of the leading figures of the French New Wave film movement, alongside Jean-Luc Godard and Francois Truffaut.
Her films include Vagabond, which won the Venice film festival's Golden Lion in 1985, and Jacquot de Nantes, about the life of her late husband, film director Jacques Demy.
'Fierce determination'
"Her work and her life are infused with the spirit of freedom, the art of driving back boundaries, a fierce determination and a conviction that brooks no obstacles," said Cannes festival organisers.
"Simply put, Varda seems capable of accomplishing everything she wants."
She will be honoured during a ceremony at the end of the 12-day festival, when the jury hands out its top prizes on 24 May.
Varda came to prominence in 1962 with Cleo from 5 to 7 and was awarded the prestigious Louis Delluc Prize for her film Le Bonheur in 1965.
She is a photographer, screenplay writer, actress, and visual artist as well as a director of both features and documentaries.
She was previously awarded the Carosse D'Or award, in recognition of her life's work, during the directors' fortnight part of Cannes in 2010.
This year's festival sees films starring Cate Blanchett, Matthew McConaughey, Marion Cotillard and Sir Michael Caine in competition.
Woody Allen's 45th film, Irrational Man, Pixar animation Inside Out and the new Amy Winehouse documentary will also screen out of competition.
French arthouse director Agnes Varda will receive an honorary Palme d'Or at this year's Cannes film festival, the first female to be handed the award.