Sara Khan, 37, will head the Commission for Countering Extremism a body that had been proposed in the wake of the terrorist attack at an Ariana Grande concert at Manchester Arena in May last year which claimed 23 lives and injured hundreds.
"The Commission for Countering Extremism will form a crucial part of this government's work to stop the scourge of extremism in all its forms and Khan is expertly qualified to lead its important work," said UK home secretary Amber Rudd.
However, there have been some concerns raised over Khan's appointment, which is effective from next month and runs for a three-year period.
Khan, born and raised in the city of Bradford, is a vocal supporter of the government's Prevent strategy, which operates through community groups, local authorities and the police to identify and "divert" those deemed to be at risk of radicalisation.
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But the scheme has proved controversial, with claims that it demonises and spies on Muslim communities. A UN Human Rights Council report in 2016 said that the Prevent strategy was "inherently flawed."
Lady Warsi, a Conservative party peer and the first Muslim woman to serve as a British Cabinet minister in the past, said many British Muslims saw Khan as a "mouthpiece" of ministers.
Harun Khan, the secretary general of the Muslim Council of Britain, said: "The fight against terrorism requires equal partnership between all parties, including Muslim communities.
"This appointment risks sending a clear and alarming message that the government has no intention of doing so. Sadly it will be seen as a move to placate those small sections of society who see Muslims as foreign, alien, rather than as equal citizens in this country."
"I recognise the scale of the challenge we face in confronting extremism and I am deeply committed to this role. I will create a Commission that is forthright in challenging extremism in the name of our shared values, fundamental freedoms and human rights," she said.
The government's independent reviewer of terrorism legislation, David Anderson, said: "The idea that she (Khan) is a government stooge is hard to reconcile with her opposition (strongly shared by me) to its ill-advised 2015-16 plans for a counter-extremism bill."
It has been directed to provide the government with impartial, external advice on the tools, policies and approaches needed to tackle extremism; support the public sector, communities and civil society to confront extremism wherever it exists; and promote fundamental, pluralistic British values.
In its initial phase, the commission is expected to produce a strategic assessment of the threat extremism presents as well as the current response and define future structures and work programmes.