The move gives the Obama campaign an opportunity to take advantage of the former president's immense popularity and remind voters that a Democrat was in the White House the last time the American economy was thriving.
Obama personally asked Clinton to speak at the convention and place Obama's name in nomination, and Clinton enthusiastically accepted, officials said. Clinton speaks regularly to Obama and to campaign officials about strategy.
Clinton's prominent role at the convention will also allow Democrats to embrace party unity in a way that is impossible for Republican rival Mitt Romney.
George W. Bush, the last Republican to hold the White House, remains politically toxic in some circles. While Bush has endorsed Romney, he is not involved in his campaign and has said he does not plan to attend the GOP convention.
Clinton will speak in prime-time at the Democratic convention in Charlotte, N.C., on Sept. 5, the night before Obama formally accepts the party nomination. While the number two on the ticket often speaks that night, the Obama campaign has instead decided that Obama and Vice President Joe Biden will speak on the same night.
Biden will speak before Obama on Sept. 6, in front of tens of thousands of people expected to fill an outdoor stadium in Charlotte, and millions more on television.
The vice president's speech will focus on outlining many of the challenges the White House has faced over the past four years and the decisions Obama made to address them, officials said.
"To us it's about deploying our assets in the most effective way," Obama campaign strategist David Axelrod said. "To have President Clinton on Wednesday night laying out the choice facing voters, and then having Vice President Biden speak right before the president in prime time on Thursday, giving a testimony to the decisions the president has made, the character of his leadership and the battle to rebuild the middle class that's so central to our message."
Clinton's role at the convention was to be formally announced Monday. It was first reported by The New York Times.
Clinton spoke at the 2008 convention, part of a healing process for the Democratic party following the heated primary battle between Obama and the former president's wife, Hillary Rodham Clinton.
Since then, the ties between Obama and Bill Clinton have strengthened significantly. Obama has called on the former president for advice several times during his term and the two have appeared together this year at campaign fundraisers for Obama's re-election bid.
Associated Press writer Beth Fouhy in New York contributed to this report.