Negroponte would oversee US spy agencies sharply criticised for recent intelligence failures and seek to bring about closer cooperation among the Pentagon, CIA and other intelligence outfits.
"If we are going to stop the terrorists before they strike, we must ensure that our intelligence agencies work as a single, unified enterprise," Bush said on Friday.
Negroponte, 65, has been the US ambassador to Baghdad for less than a year.
"I appreciate your confidence in choosing me for what will no doubt be the most challenging assignment I have undertaken in more than 40 years of government service," Negroponte said.
Bush picked National Security Agency Director Lieutenant-General Michael Hayden as Negroponte's deputy, putting together a team that will oversee the 15 US intelligence agencies.
The president made clear that the new intelligence chief would have power over the sometimes competing spy agencies and the authority to set budgets, order the collection of new intelligence and ensure information-sharing.
"If we are going to stop the terrorists before they strike, we must ensure that our intelligence agencies work as a single, unified enterprise"
"It will be John's responsibility to determine the annual budgets for all national intelligence agencies and offices and to direct how these funds are spent," Bush said.
Negroponte will have daily access to Bush as his primary intelligence briefer. "I trust his judgment," Bush said.
The nominations of Negroponte and Hayden must be approved by the US Senate.
Senate Intelligence Committee Chairman Pat Roberts, said confirmation hearings would begin as soon as Negroponte finished his job in Iraq.
Negroponte, previously the US ambassador to the United Nations, has broad diplomatic experience but is not an intelligence insider.
Creating the new top intelligence position was a central recommendation made by the US commission that investigated the September 11 attacks.
Negroponte's career has not been without controversy.
His confirmation as ambassador to the UN was delayed by six months in 2001 as he defended himself against charges that he covered up human rights abuses by the US-backed Honduran government in the 1980s.
But the Senate quickly approved him after the September 11 attacks.