Gates, a moderate with long-standing ties to Republican administrations and the Bush family, would fulfill an Obama pledge to include a Republican in his Cabinet.
Retaining Gates provides stability for a stretched military fighting two wars during the turbulent changeover in administrations. Gates once said it was inconceivable that he would stay on past the close of Bush's term on Jan. 20.
But the 65-year-old former spymaster had recently turned mum in public on the circumstances under which he would stay, even briefly, in an Obama administration.
Keeping Gates might afford Obama a sort of extended transition, in which critical military issues are left in trusted hands while Obama focuses most intensely on the financial crisis.