David Hill, a former chief spokesman for the Labour Party, will take over Blair's communications office although no start date has been given.
Hill is seen as a straight-talker who could help his boss overcome Campbell's reputation for spin.
His appointment comes after Alistair Campbell quit amid an escalating row over whether the government ''sexed-up'' the threat from Iraqi weapons.
"We agreed on 7 April this year that I would definitely leave this summer and I have now given the prime minister formal notice of my decision to leave," Campbell said in a statement released by Blair's Downing Street office.
But despite attempts to make the resignation seem routine, there is little doubt the row over Iraqi weapons had claimed its first prominent scalp.
Campbell was accused of sexing
up an Iraq dossier
As Blair's chief media aide, many credited the British government's dossier on Iraq's weapons of mass destruction to Campbell.
Dark hints were aplenty that the dossier could have been ''sexed-up'' at Campbell's insistence.
Campbell found himself at the very centre of the unsavoury controversy, that grew messier with the death of the British weapons expert David Kelly.
A Downing Street spokesman said Campbell would not be leaving his job immediately but gave no date for his departure.
Campbell's resignation would be regarded as a body blow to an already beleaguered Blair.
His exceptionally close relationship to Blair led analysts to believe Campbell was as good as the deputy Prime Minister.
One of Campbell's closest political friends, senior Labour politician Fraser Kemp, said: "Alistair Campbell made an imeasurable contribution to the success of new Labour and, by definition, the destruction of the British Conservative Party.
"Both of which are tremendous political achievements that will live in history."
Kemp, who was told the shock news by Aljazeera.net, is MP for Houghton and Washington constituency and a Government whip.
But Deputy Prime Minister John Prescott dismissed the so-called "shock value" of Friday's resignation said it was "an open secret" Campbell had planned to quit Downing Street.
Campbells's replacement, the bespectacled and balding Hill, was Labour's director of communications and helped the party win a historic landslide at the 1997 general election.
Hill, 55, left to run a public relations firm but returned briefly to help Blair win a second term in 2001.
Supporters say the blunt Hill will be an antidote to Campbell's reputation as the ultimate master of spin.
"Hill finds it almost pathologically impossible to deceive or dissemble," former Labour Party deputy leader Roy Hattersley wrote in the Guardian newspaper.
"That is why he is the right man to reestablish a relationship of trust between Downing Street and the press and, in consequence, between Downing Street and the general public."
Hill was raised on a council estate in the central English industrial city of Birmingham and is still an avid fan of one of its soccer teams, Aston Villa.
He studied at Oxford, and quit a brief stint as a trainee business manager to enter politics.
He once campaigned against membership of the European Community and in favour of nuclear disarmament as a Labour Party activist.
But as his views mellowed, Hill moved with the Labour Party as it shifted towards the centre ground of British politics.