The small West African state was one of a few African countries, along with Burkina Faso and Swaziland, to recognise self-ruled Taiwan, which China regards as a renegade province to be recovered by force if necessary.
"This decision has been taken in our strategic national interest. We are proud that we have been a very strong and reliable partner of the ROC (China) for the past 18 years, the results of which are there for every Taiwanese to see," the statement said.
It said Gambia and Taiwan would remain friends.
Gambia is the second African state to announce a change in its diplomatic relationship with China this week.
Officials in the tiny island nation of Sao Tome and Principe said on Tuesday China plans to open a trade mission to promote projects there.
The decision comes 16 years after China broke off relations over the tiny Central African nation's diplomatic recognition of Taiwan.
Sao Tome officials did not say whether the new cooperation deal with Beijing would affect diplomatic ties with Taiwan.
Taiwan Foreign Minister David Lin told legislators in Taipei it seemed unlikely Sao Tome would switch recognition to China but added Taiwan will "review its existing assistance programmes for Sao Tome to see if any adjustment is necessary".
Sao Tome and Principe's economy is heavily dependent on cocoa exports but its position in the middle of the oil-rich Gulf of Guinea has raised interest in its potential as a possible future oil and gas producer.
China says Taiwan has no right to diplomatic recognition as it is part of China. The two have been governed separately since the Communist Party won the Chinese civil war in 1949, and the Nationalists fled across a 180-km-wide strait to Taiwan.
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