"Few Americans can boast the breadth of experience that Bill brings to this job," Obama told reporters in the East Room as Daley, 62, stood at his side.
"But most of all, I know Bill to be somebody who cares deeply about this country," the president said.
The appointment represented the most significant move in a far-reaching and ongoing staff shakeup that included the departure of Obama's press secretary and several key deputies and economic advisers. It came the day after Republicans officially assumed control of the House and increased their numbers in the Senate.
Daley, who served as commerce secretary for President Bill Clinton, offers criteria Obama wants for the new environment in Washington: an outsider's perspective, credibility with the business community, familiarity with the ways of the Cabinet and experience in navigating divided government.
"I'm convinced that he'll help us in our mission of growing our economy and moving America forward," Obama said.
Daley made a pledge to the president: "This team will not let you down - nor the nation."
Daley replaces Pete Rouse, the interim chief of the last three months and a behind-the-scenes Obama adviser who did not want the position permanently and recommended Daley for it. Rouse, who received warm praise from Obama and sustained applause from staffers watching in the East Room, will remain as a counselor to the president, an elevated position from his former job as senior adviser.
Daley was expected to start as chief of staff within the next couple of weeks. His brother, Richard Daley, is the mayor of Chicago, the post that Obama's first chief of staff, Rahm Emanuel, left his job in October to seek. The Daley brothers are sons of Richard J. Daley, who was Chicago's mayor from 1955 to his death in 1976.
Although Chicago is also Obama's hometown, the president has not had a close relationship with his new chief of staff. But Obama alluded to the Daley political legacy, joking that he "has a smidgen of awareness of how our system of government and politics works. You might say it is a genetic trait."
Daley will assume one of the most important and influential jobs in American government as an adviser and gatekeeper to Obama. He will be thrust into the heart of national politics just as Obama adapts to a new reality in Washington, with Republicans working to gut his signature health care law and pushing for major cuts in spending.
Although Daley has not sought elective office himself, he has long been immersed in politics.
He helped Clinton pass the North American Free Trade Agreement before joining his Cabinet. Later, he ran Al Gore's 2000 presidential campaign and the historic recount effort that ended with Gore conceding the race to George W. Bush.
When Obama launched his presidential campaign, the Daley family put aside its deep connections to Bill and Hillary Rodham Clinton and endorsed the young Illinois senator. Until then, Obama and the Daleys had largely operated separately in Illinois politics - not helping each other much but not attacking each other, either. After Obama's victory, Daley helped oversee the presidential transition.