The ECB has also appointed ex-Test batsman James Whitaker as chairman of selectors after announcing Geoff Miller's surprise resignation.
I am excited by the challenge of building on the success which England have enjoyed in recent years
Downton, 56, replaces Hugh Morris, who quit to take up the dual role of chief executive and managing director at County Championship side Glamorgan.
Ex-England captains Andrew Strauss and Nasser Hussain were linked to the job.
"I am honoured to have been offered this position and the trust which the ECB has placed in me," said Downton, who starts his new job on 1 February.
"I am excited by the challenge of building on the success which England teams have enjoyed at all levels in recent years."
Downton played 30 Tests for England between 1981 and 1988, plus 28 one-day internationals. He was part of the squads which won the Ashes in 1981 and 1985, and reached the 1987 World Cup final.
The ex-Kent and Middlesex player also played in six County Championship-winning teams. He was forced to retire from the game after a bail struck him in the eye during a Sunday League match.
Since retiring in 1991, he has been an active member of Middlesex, ECB Cricket and MCC committees and pursued a law career in the City.
ECB chief executive David Collier said Downton's experience in cricket and business made him "the outstanding candidate" to replace Morris, who announced he was leaving the role last month and had said Strauss, 36, would do a "great job" if named as his successor.
Collier added: "Paul's experience of a World Cup final, Ashes success, six County Championship wins and 58 international appearances for England provides a wealth of cricket experience.
"His background in law when coupled with his experience in the City provides the unique set of skills which is required to lead and manage the England Cricket Department's £100m budget over the next four years."
The ECB said Miller, 61, announced his intention to step down from his role during the summer's Ashes win against Australia. He joined the England selection panel in 2000, before replacing David Graveney as chairman of selectors eight years later.
Former England and Leicestershire batsman Whitaker, 51, replaces Miller after being part of the selection panel for the past eight years.
Ex-England wicketkeeper Paul Downton has been named as the England and Wales Cricket Board's new managing director.