The move fulfills Obama's campaign promise to expand and tweak a faith-based office founded by former President Bush.
The office will be led by Joshua DuBois, a 26-year-old Pentecostal minister, who headed religious outreach for Obama's Senate office and later his campaign.
Obama is also expected to name 25 religious and secular leaders to an advisory board, including the Rev. Joel Hunter, senior pastor of Northland Church, a megachurch in Flordia; Rabbi David Saperstein, director of the Religious Action Center of Reform Judaism.
Before the signing, the president attended the National Prayer Breakfast in Washington, D.C. where he assured religious groups that his administration will help them, but said his expansion of the faith-based White House office will strive to keep secular and religious groups on a level playing field.
"The goal of this office will not be to favor one religious group over another -- or even religious groups over secular groups," Obama said. "It will simply be to work on behalf of those organizations that want to work on behalf of our communities, and to do so without blurring the line that our founders wisely drew between church and state."
The most contentious issue surrounding the updated office, potential restrictions on the hiring practices of religious groups that receive taxpayer dollars, will undergo a thorough legal review before Obama makes a decision on hiring guidelines.
The order would also direct White House officials and lawyers to work with the Justice Department to develop a hiring policy, according to a religious leader with knowledge of the plans. The official spoke on condition of anonymity because the details have not been released.
The deliberate approach is unlikely to please either conservative religious leaders, who worry they'll need to compromise their religious beliefs to participate, or liberal religious and secular leaders, who want to quickly undo Bush administration hiring practices.
"Neither side is going to get exactly what they want," the religious leader said.
Obama on Thursday warned that "far too often," faith is used as a "tool to divide us from one another."
But, he said, "there is no religion whose central tenet is hate" and all religions teach people to love and care for one another. That is the common ground underlying his faith-based office, he said.
To secular and religious groups that want to contribute to their communities, he said: "People trust them. Communities rely on them. And we will help them."
During his presidential campaign, Obama said he wanted to expand the White House faith-based efforts Bush began. But while he endorsed Bush's initiative to give religious groups more access to federal funding, he also promised to tweak the program.
"Now, make no mistake, as someone who used to teach constitutional law, I believe deeply in the separation of church and state, but I don't believe this partnership will endanger that idea -- so long as we follow a few basic principles," Obama said during a campaign speech in Zanesville, Ohio.
Obama's advisers want to be certain tax dollars sent to the faith-based social service groups are being used for secular purposes, such as to feeding the hungry or housing the homeless -- not for religious evangelism. The administration doesn't want to be perceived as managing the groups yet does want transparency and accountability.
Obama pledged during the campaign to allow religious institutions funded through his revamped faith-based office to hire and fire based on religion -- but only for their activities that are privately funded.
One question is whether the faith-based office will continue to hand out grants under the Bush rules while the hiring issue is under legal review.
Jim Wallis, a member of the new advisory council, downplayed the significance of the hiring issue. He said it came up only once in transition meetings, and that poverty, human trafficking and the Middle East were discussed in much more detail.
"I'm sure it will come up, but it's not the dominant issue," said Wallis, founder of the liberal Christian social-justice network Sojourners.
The council is also expected to weigh in on the hiring issue, with no timeframe set for resolution.
The Associated Press contributed to this report.