The endorsement comes a day after Somchai ended 12-days of emergency rule in Bangkok, imposed to quell violent clashes between government critics and supporters which left one person dead and dozens more injured.
The PPP's leadership had earlier sought to return Samak to office, but by Friday it had become clear that it would be unable to muster sufficient support.
Kuthep Saikrajang, a party spokesman, said the PPP's executive committee had settled on endorsing Somchai following a weekend of closed-door talks.
Ties to Thaksin
But the People's Alliance for Democracy (PAD) – a mixture of royalists, businessmen and union activists opposed to the government – immediately rejected the choice.
"We believe this is not going to end easily and we have to closely watch what they are going to do next," Somkiat Pongpaibul, one of the five main PAD leaders, told protesters at Government House in Bangkok, where anti-government demonstrators have camped out for over three weeks.
Somchai's ties to Thaksin – his wife is the former leader's younger sister – led to allegations of nepotism during his time as the top civil servant at the justice ministry.
He denies the accusation, noting he got the job before Thaksin came to power.
Hundreds of protesters have been occupying the prime minister's official compound for the last three weeks, accusing the ruling PPP-led coalition of being a Thaksin puppet.
They have vowed to continue protesting until a suitable prime minister is installed.
"Somchai is very close to the Shinawatra family," said Chamlong Srimuanng, one of the protest leaders.
"He is Thaksin's brother-in-law and will be even more his proxy than Samak ever was."