The 57-year-old Sharif, who is considered an old India hand and whose elder brother died in the 1971 war with India, was chosen by Prime Minister Nawaz Sharif to end several months of speculation. Lt Gen Rashad Mahmood was named the new Chairman of the Joint Chief of Staff Committee.
The premier held separate meetings with Mahmood, currently Chief of General Staff, and Sharif, now the Inspector General for Training and Evaluation, here before approving their promotion to the crucial posts.
Both generals superceded Lt Gen Haroon Aslam, currently Chief of Logistics Staff and the senior-most general after Kayani. He is scheduled to retire in April.
The 61-year-old Kayani will hang up his boots on Friday after being at the helm of the army for six years. He was given an unprecedented three-year extension in 2010.
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The appointment of Sharif comes amid tensions on the border with India and Pakistan's fight with Taliban insurgents and increased violence in the country.
Pakistani analysts view Sharif, who will head the 600,000-strong army, as a moderate who sees the militant threat inside Pakistan as just as important as the strategic tussle with India.
Before his current posting as a Principal Staff Officer in General Headquarters, Sharif commanded the Gujranwala-based XXX Corps, which is responsible for the Line of Control and the international border in Punjab, between 2010 and 2012.
Sources said another factor that could have influenced the premier's decision on the new army chief is that unlike other generals who were in contention, Sharif does not have "strong political views".