Newly elected Congress lawmakers banged their tables in the timber-panelled central hall of parliament, as the unanimous decision was announced two days after Gandhi's shock election win over the ruling Hindu nationalists.
"I feel deeply humbled, I feel greatly privileged," she said, standing under life-sized portraits of former prime ministers, including her assassinated husband Rajiv, mother-in-law Indira and Indira's father Jawaharlal Nehru.
"I thank the people of India from my heart. We have succeeded against all odds, we have prevailed despite all predictions of disaster. There is now a momentum generated by our revival, let us not squander it. We must utilise it as a catalyst for change."
Congress' election of Gandhi as its parliamentary leader was expected and means that, having already secured the support of key allies, she will be prime minister, barring any last minute hitches with new political partners.
"We have succeeded against all odds, we have prevailed despite all predictions of disaster. There is now a momentum generated by our revival, let us not squander it. We must utilise it as a catalyst for change"
Indian Prime Minister
Gandhi, 57, will be the first foreign-born person and the fourth member of the venerable Nehru-Gandhi dynasty to take the office.
In all, the dynasty has ruled the world's second most populous nation for 35 of the 57 years since independence.
Leftist parties, which made record gains to snatch more than 60 seats, met on Saturday to debate whether to join Gandhi's government or simply support it from outside.
Congress needs their backing because it does not have a majority in the 545-seat parliament.
But their pivotal power, led by the Communist Party of India (Marxist) (CPM) with 33 seats, has alarmed investors, worried about the future of privatisations and other economic reforms in Asia's third-largest economy.
Communist leaders said they would announce their decision on Sunday and also moved to reassure markets a day after the rupee and Indian shares crashed to their lowest in months.
Atal Behari Vajpayee resigned
after the BJP loss in the polls
"Foreign investment is welcome, provided that they satisfy three conditions," said CPM economics guru Sitaram Yechuri.
"They must augment the existing productive capacities of the country, they must upgrade technology and foreign investment must lead to employment generation.
"In a globalised world, no country can remain insulated from foreign capital flow."
Gandhi ousted India's Hindu nationalists on Thursday in possibly India's biggest poll upset, surprising everyone, including Congress. However, she is still considered a
political novice, only taking over Congress in 1998.
Congress vowed to continue the reforms it started more than a decade ago when it broke India out of socialist-style economics and which were continued by the ousted Bharatiya Janata Party-led coalition.
But analysts also expect it to repackage the reforms after India's hundreds of millions of poor threw out the BJP because it failed to pass on the benefits of a booming economy, which mainly went to the relatively small urban middle class.