Tony Blair is to become a Middle East envoy working on behalf of the US, Russia, the UN and the EU.
The announcement came just hours after he stood down as UK prime minister and shortly before it was announced he was to quit as a member of parliament.
Mr Blair said a "solution" to the problems in the Middle East was possible but that this would require "huge intensity and work".
Russia opposed his appointment initially but has since agreed to it.
During his final prime minister's questions on Wednesday, Mr Blair was asked about the Israeli-Palestinian dispute.
Challenge
He told MPs: "The absolute priority is to try to give effect to what is now the consensus across the international community - that the only way of bringing stability and peace to the Middle East is a two-state solution."
Mr Blair's appointment comes at a time of heightened tension in the region.
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Earlier this month Hamas militants overran the Gaza Strip, defeating the Fatah movement led by Palestinian Authority President Mahmoud Abbas.
Mr Abbas, who is supported by Western countries and Israel, now effectively controls the West Bank only.
He has sacked the Hamas-led unity cabinet and declared a state of emergency.
BBC Middle East editor Jeremy Bowen says failure in the Middle East is more likely than success.
Israelis like Mr Blair because they believe he is on their side and Palestinians in the main do not trust him for the same reason, our correspondent adds.
'Peace maker'
But senior UN officials describe Mr Blair as a star player who will bring energy to the peace process.
Mr Blair, who had been UK prime minister since 1997, was replaced by Gordon Brown on Wednesday.
He has proved a controversial figure in the UK and elsewhere for his decision to lead the UK into the Iraq war.
But he has also been widely praised for his efforts in bringing the peace process to fruition in Northern Ireland.
At prime minister's questions, Northern Ireland First Minister Ian Paisley said: "I just want to say to the prime minister this one word: He has entered into another colossal task.
"I hope that what happened in Northern Ireland will be repeated and at the end of the day he will be able to look back and say it was well worthwhile."
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