Former Ulster Unionist Party deputy leader John McCallister has resigned from the party following the agreement with the DUP to field a joint candidate for the Mid-Ulster seat vacated by Martin McGuinness.
Mr McCallister said he would sit as an independent unionist in the Assembly.
He said last night he had informed party leader Mike Nesbitt and his constituency association.
Mr McAllister's decision came as the DUP and UUP agreed to field joint candidate Nigel Lutton, whose father Frederick, a former RUC reservist, was shot dead by the IRA in 1979, in the Mid Ulster by-election.
In a statement issued after separate meetings of their Mid-Ulster constituency associations, the two parties said Mr Lutton, who previously had DUP connections, had received unanimous support.
First Minister and DUP leader Peter Robinson said: "The announcement that Nigel Lutton is to contest the by-election as an agreed unionist standard bearer is tremendous news and will be welcomed by tens of thousands of unionists in both the Mid-Ulster area and more generally throughout Northern Ireland as a common-sense response to the demands to see unionists co-operating together."
UUP leader Mike Nesbitt recommended Mr Lutton to his constituency association in Moneymore while Peter Robinson did the same at a DUP meeting in Magherafelt.
Mr Nesbitt said he had known Nigel Lutton since his days with the Victims Commission and recognised as "a man of total integrity, who was robbed of a father in a cruel and senseless murder".
Meanwhile, loyalist campaigner Willie Frazer withdrew from the race to support Mr Lutton. The by-election is due to be held on March 7.