A new, to our knowledge, scheme of all-optical switching is put forward by use of an all-fiber Mach-Zehnder interferometer incorporating ytterbium-doped fiber Bragg gratings. The device utilizes the characteristics of the sharp change of group velocity in transmission with the detuning parameter, delta = 2pi n(1/lambda - 1/lambdaB). The switching is achieved by changing the Bragg wavelength of the ytterbium-doped arm of the interferometer. A very small shift of the Bragg wavelength can lead to a pi phase shift between the two arms, so the power needed to realize complete switching is much lower than that of other schemes. In addition, the device can compensate the dispersion of an optical pulse through the positive group velocity dispersion in transmission provided by the gratings.