In a purely ceremonial vote at a congress a day before Erdogan takes office as president, the AKP overwhelmingly approved Davutoglu, who was the only candidate standing.
Davutoglu -- foreign minister since 2009 -- is due to take over on Thursday when Erdogan is sworn in and rapidly form a new government.
He had earlier sought to shake off his image as a bookish academic with a impassioned and sometimes noisy speech to the congress that strained the limits of the sound system in the Ankara area and left him dripping with sweat.
"There will be no conflict between the president and the prime minister, who are both elected by popular vote.
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"We will build the new Turkey hand in hand, shoulder to shoulder. No one can sow the seeds of animosity between the comrades."
Showing his combative side, Davutoglu slammed the anti-government protests last year over the redevelopment of an Istanbul park as an attempt "to destroy the self-confidence that we have instilled in our people".
He vowed to build a strong Turkey that would flourish and would not collapse like the Ottoman Empire.
"We are on the eve of a march of the new Turkey. We will pass this everlasting march to our successors and next generations."
Davutoglu also repeated Erdogan's vows to seek a new constitution for Turkey after 2015 legislative elections that would invest the presidency with greater powers.
"A new constitution, a constitution that would recognise freedoms, will pave the way for Turkey ahead," he said.