He also named Nancy-Ann DeParle, commissioner of the Department of Human Services in Tennessee and a Clinton administration official, as the new health czar, heading up the new White House Office for Health Reform.
Obama, whose previous nominee Tom Daschle withdrew amid tax problems, said his second choice "knows health care inside and out" and praised her record of bipartisanship as well as her experience as state insurance commissioner in Kansas.
"As a governor she's been on the front lines of our health care crisis. She has a deep knowledge of what the burden of crushing costs does to our families and businesses," Obama said.
Sebelius said she shares Obama's "passion and personal commitment to health care reform" and cited her two decades working on the issue first as a legislator and later as governor.
"We can't fix the economy without fixing health care," she said.
As HHS secretary, Sebelius will work with Democrats and Republicans to cut costs, expand access and improve the quality of health care in the nation, the White House wrote in a paper statement.
"If we are going to help families, save businesses, and improve the long-term economic health of our nation, we must realize that fixing what's wrong with our health care system is no longer just a moral imperative, but a fiscal imperative. Health care reform that reduces costs while expanding coverage is no longer just a dream we hope to achieve -- it's a necessity we have to achieve," Obama said in the statement.
The White House noted that $155 million authorized in the American Recovery and Reinvestment Act will be spent on 126 new health centers for people without insurance to gain access to health care services. Those centers will create jobs and give health care to about 750,000 Americans, the White House predicted.
The announcement of Obama's health and human services secretary nominee comes just days before the president holds a White House summit on health care. Lawmakers from both parties and representatives of major interest groups, from insurers to drug companies to consumers, will attend.
Gaining their support -- as well as winning confirmation -- are among the 60-year-old governor's first challenges. Sebelius, whose abortion rights positions alarm some on the right, will be a very public face for Obama's plans for health care, although DeParle will handle many of the new policy moves.
The recession has taken its toll on Medicare, which provides health care for older people and the disabled. Plunging tax revenues have weakened the program's giant hospital fund, accelerating its projected insolvency to as early as 2016. That is only about five years after the first baby boomers will start signing up for services.
The Food and Drug Administration, meanwhile, is reeling from a seemingly endless series of safety lapses.
Sebelius is seen as a steady hand and an experienced public official but is also Obama's backup plan.
Originally, the president had counted on former Senate Majority Leader Daschle to shepherd his health overhaul agenda through Congress. Daschle would have worn two hats: health secretary and health czar.
But Daschle withdrew his nomination after disclosing he had unpaid tax problems. That left the new administration scrambling to find a substitute secretary.
Obama made his opening move on a health care overhaul last week: his speech to Congress and a budget that set aside $634 billion over 10 years as a down payment on coverage for all. It's a goal that could ultimately cost $1 trillion or more.
Obama wants to expand coverage while slowing the rate of increase in costs. Administration officials say they hope that will lead to a more affordable system, without the coverage gaps that leave an estimated 48 million people uninsured.
The Associated Press contributed to this report.