Annan announced the appointment of Ahtisaari as his special envoy to the Kosovo status talks in a letter to the Security Council on Tuesday.
Ahtisaari's excellent negotiating skills, proven leadership, previous experience in the United Nations and knowledge of the Balkans make him an ideal person for this feat, Annan's spokesman Stephane Dujarric said.
Ahtisaari helped broker a ceasefire between Serbia and NATO in 1999.
Last week the Security Council supported the start of talks on the future status of Kosovo after the United States and the European Union warned that the status quo in the province was untenable.
Annan said in his letter that Albert Rohan, former secretary-general of the Austrian Ministry of Foreign Affairs, should be Ahtisaari's deputy.
Ahtisaari is expected to set up his headquarters in Vienna, and to arrive in Kosovo later this month.
Government institutions and leading Albanian political parties in Kosovo welcomed Ahtisaari's appointment on Tuesday.
Kosovo, formally a part of Serbia, has been under UN administration since 1999. Ethnic Albanians account for 90 per cent of the province's population of about 2 million and demand full independence. Belgrade wants Kosovo to remain a province within Serbia and offers it broad autonomy.