Tony Blair is to become a Middle East envoy working on behalf of the US, Russia, the UN and the EU.
Tony Blair stepped down after a decade as Britain's PM
The announcement came just hours after he stood down as UK prime minister and shortly before it was announced he was to quit as a member of parliament.
Mr Blair said a solution to Mid-East problems was possible but it required "huge intensity and work".
He faces an uphill task to address Palestinian misgivings over his ties to Israel and the US, say observers.
During his final prime minister's questions on Wednesday, Mr Blair was asked about the Israeli-Palestinian dispute.
He told MPs: "The absolute priority is to try to give effect to what is now the consensus across the international community - that the only way of bringing stability and peace to the Middle East is a two-state solution."
Palestinian Authority President Mahmoud Abbas has welcomed Mr Blair's appointment - which was delayed because of Russia's reservations.
But the militant group Hamas said "it was not helpful in solving the conflict in the Middle East", arguing that Mr Blair's position mirrored those of the US and Israel.
Observers point out that Mr Blair's mission, as defined by the "Quartet" of international mediators which appointed him, is narrow.
His brief includes Palestinian governance, economics and security rather than the wider conflict between Israel and Palestinians - at least initially.
Mr Blair replaces the Quartet's previous envoy, former World Bank president James Wolfensohn who last year resigned in frustration at the lack of progress.
BBC Middle East editor Jeremy Bowen says failure in the Middle East is more likely than success.
Israelis like Mr Blair because they believe he is on their side and Palestinians in the main do not trust him for the same reason, our correspondent adds.
Furthermore, Mr Blair's appointment comes at a time of heightened tension in the region.
Earlier this month Hamas overran the Gaza Strip, defeating the Fatah movement led by Mr Abbas, who now effectively controls the West Bank only.
Hamas controls the Gaza Strip nowadays
But senior UN officials describe Mr Blair as a star player who will bring energy to the peace process.
Mr Blair, who had been UK prime minister since 1997, was replaced by Gordon Brown on Wednesday.
He has proved a controversial figure in the UK and elsewhere for his decision to lead the UK into the Iraq war.
But he has also been widely praised for his efforts in bringing the peace process to fruition in Northern Ireland.
At prime minister's questions, Northern Ireland First Minister Ian Paisley said: "I hope that what happened in Northern Ireland will be repeated and at the end of the day he will be able to look back and say it was well worthwhile."