Kandahar people are still leaving for Pakistan
He will be assisted by Mullah Naqibullah - the man to whom the Taleban surrendered on Friday.
The deal was brokered at a meeting chaired by Hamid Karzai, the head of Afghanistan's new interim government whose own supporters were also involved in the struggle to prise the city from Taleban control.
The meeting was held at the bombed-out former residence of Taleban supreme leader, Mullah Mohammed Omar.
Tensions between the different groups - in particular between Gul Agha's men and Mullah Naqibullah's supporters - had threatened prospects for peace and security after the departure of the Taleban.
Law and order
Hamid Karzai told the BBC he had asked all local commanders to accept the decision to re-install Gul Agha as governor.
He also denied that there was a problem with law and order in the city.
However, a local resident who reached the Pakistani border town of Chaman on Sunday told the BBC that gunfire could still be heard and that there were incidents of vehicle theft.
Earlier on Sunday, a tribal commander said that overnight clashes between troops loyal to Mullah Naqibullah and supporters of Gul Agha had continued during the day.
But Khalid Pashtoon, spokesman for Gul Agha, said that the report was "lies" and that Kandahar was "completely quiet".
There were also reports of looting of aid agency offices and government buildings.
A spokesman for the International Committee of the Red Cross, Michael Kleiner, said the skirmishes had prevented its workers from recovering bodies of those killed in previous fighting from streets and homes.
He added that rival groups had set up at least 15 roadblocks on the road from Kandahar to the border town of Spin Boldak and that the ICRC was trying to negotiate the safe passage of aid convoys.
'Working for peace'
Gul Agha was reported to have been unhappy with a deal struck by Mullah Naqibullah with Mr Karzai to accept the Taleban surrender.
The Taleban are said to have given all their tanks and heavy weapons to Mr Naqibullah.
The BBC's Peter Greste says Mr Naqibullah is regarded by the Pashtun tribes as an honest broker, untarnished by many of the excesses of either the Taleban or the old mujahideen fighters.
Originally a mujahideen commander against the Russians, he joined the Taleban in 1994 but changed sides again recently to support Mr Karzai.