Karnit Flug succeeds former central bank chief Stanley Fischer. Flug will be the institution's first female head, and had been leading the Bank of Israel on an acting basis since Fischer left his post in June after eight years on the job.
Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid announced their decision after meeting Sunday.
"We have been impressed by Dr. Flug's performance as acting Governor in recent months and we are certain that she will continue to assist us in moving the Israeli economy to additional achievements in the face of the global economic upheaval," the two men said in a joint statement.
Flug, 58, studied economics at the Hebrew University in Jerusalem and earned her doctorate at Columbia University in New York. Most of her career was at the Bank of Israel where she served in senior positions. In the mid 1980's she was an economist at the International Monetary Fund. She speaks Hebrew, English, Spanish and Polish.
"The Israeli economy faces significant challenges," Flug said in a statement, adding that she looks forward to working with the bank and the government to "meet these challenges."
Her appointment still needs government approval, a step that is largely procedural and is expected to take a few days.
Fischer, who is widely credited with steering the Israel's economy safely through years of world financial turmoil, had recommended Flug for the post.
Jacob Frenkel, a former central bank chief and Wall Street titan, withdrew in July after a committee questioned a shoplifting incident at a Hong Kong airport seven years ago. Frenkel said he mistakenly thought his companion paid for an item he was carrying.
In August, designated chief Leonardo Leiderman announced he was withdrawing. He did not give a reason, but the announcement came a day after an Israeli television channel reported that Leiderman regularly consulted with an astrologist.