Donald Rumsfeld has accepted a request from President George W Bush to stay on as US Defence Secretary, a senior administration official has said.
Rumsfeld was one of the chief architects of the Iraq war
Mr Rumsfeld was a proven leader in difficult times, the official said.
The defence secretary had faced calls to go, especially over the abuse of Iraqi prisoners by US soldiers at Abu Ghraib and military setbacks in Iraq.
But Mr Bush clearly regards Mr Rumsfeld as a key figure as he overhauls his cabinet, correspondents say.
Mr Bush asked Mr Rumsfeld on Monday to stay in his post and he agreed, said the official.
"Secretary Rumsfeld is a proven leader during challenging times. We're fighting a different kind of war and it's crucial that we win this war," the official said.
Mr Rumsfeld's future had been the last big question over the composition of Mr Bush's cabinet.
More than half of its members are leaving as the president prepares to start his second term.
Mr Rumsfeld, 72, is both the oldest and the youngest defence secretary, having held the post nearly 30 years ago in Gerald Ford's administration.
One of the "hawks" on the Bush team, Mr Rumsfeld was closely involved in the decision to invade Afghanistan in 2001 and was the chief architect of the Iraq war.
His tough style has won him admirers but also gained him enemies and detractors inside and outside the US defence establishment, says the BBC's Pentagon correspondent Nick Childs.
The defence secretary has been criticised for failing to send sufficient troops to stabilise Iraq in the wake of Saddam Hussein's fall.
There were loud calls for his resignation earlier this year when the abuse committed by American soldiers at Baghdad's Abu Ghraib prison came to light.
Rumsfeld aims to complete a reform of the US military
At the time he said he would quit if that would help but not merely to satisfy the administration's political enemies.
And despite his detractors, Mr Rumsfeld still bristles with energy.
He faces numerous challenges, including continuing operations in Afghanistan and to see through his plans to transform the US military into a smaller, lighter and more agile force that makes full use of technology.
But the continuing violence in Iraq, where elections are planned for January, looms as the biggest and most difficult challenge.
The Pentagon announced this week that troop numbers in Iraq were being increased to 150,000, more than actually invaded the country.