"He's not beholden to any one ideology, and he's worked tirelessly to improve teacher quality," Obama said.
Duncan stood nearby, the latest member to be named to the Cabinet of the president-elect. His appointment is subject to Senate confirmation.
"No issue is more pressing than education. ... It is the civil rights issue of our generation," Duncan said in brief remarks.
Obama combined his announcement with a brief news conference in which he refused to say whether he supports the idea of a special election to fill the Senate seat he recently vacated.
Illinois Gov. Rod Blagojevich has the power to make the appointment, but he was arrested last week and charged with, in effect, trying to enrich himself by appointing a new senator who could help him financially or politically.
Some Democrats have called for a special election, while others prefer to wait for Blagojevich to resign, a step that would allow Lt. Gov. Pat Quinn to appoint a new senator. The second alternative would ensure the seat remains in Democratic hands, and on a faster timetable than a special election would allow.
Obama cut off a reporter who sought to ask a question about Rep.
Rahm Emanuel, the incoming White House chief of staff, who was reportedly heard on a federal wiretap talking with an aide to Blagojevich about potential Senate replacements. The president-elect said he has not been able to confirm that is the case.
Neither Obama nor Emanuel has been accused of any wrongdoing, and the president-elect has said he will make the results of an internal investigation into the matter public soon.
The appointment of Duncan left a handful of Cabinet appointments yet to be made public, and in response to a question, Obama hinted broadly a Republican would be among them.
The posts yet to be filled include secretaries for the departments of Labor, Transportation, Agriculture and Interior, where officials have said Democratic Sen. Ken Salazar of Colorado has been tapped. Nor has Obama named leaders for the intelligence agencies, or a trade representative.
So far, Defense Secretary Robert Gates, a holdover from the Bush administration, is the only Republican member of the incoming Cabinet.
On the economy, the president-elect said the Federal Reserve was "running out of ammunition" in terms of lowering interest rates to combat the recession. He said it was "absolutely critical" that his economic recovery program be put into place to deal with what he called the toughest time economically since the Great Depression.
The Fed was expected to announce the latest in a series of rate cuts later in the day.
Obama spoke of Duncan in glowing terms - and joked that his longtime friend, a former professional basketball player in Australia, had the superior jump shot.
"In just seven years, he's boosted elementary test scores here in Chicago from 38 percent of students meeting the standards to 67 percent. The dropout rate has gone down every year he's been in charge."
On a key standardized test, Obama said, "the gains of Chicago students have been twice as big as those for students in the rest of the state."
Duncan would take over a sprawling department that has focused during the Bush administration in winning passage and then implementing the president's signature No Child Left Behind education program.
That effort has proven controversial, with supporters saying it is making progress in improving student skills, while local officials complain it focuses too much attention on standardized tests.
Obama said it was time for Washington to move beyond "tired debates" such as whether to approve the use of vouchers for students to attend private schools.
"We cannot continue on like this. It is morally unacceptable for our children and economically untenable for America," said the president-elect.
Duncan has run the country's third-biggest school district since 2001, pushing to boost teacher quality and to improve struggling schools and closing those that fail.
The news conference took place at the Dodge Renaissance Academy on Chicago's West Side, a facility that Duncan shut down and then reopened. Obama and Duncan visited the school together in 2005.
A 44-year-old Harvard graduate, Duncan has played pickup basketball with Obama since the 1990s. Duncan co-captained the Harvard basketball team and played professionally in Australia before beginning his education career.
He ran a nonprofit education organization on Chicago's South Side before going to work in Chicago schools under former superintendent Paul Vallas, now the New Orleans schools chief.
Duncan's nomination will please reform advocates who wanted a big-city schools chief who has sought to hold schools and teachers accountable for student performance; they had backed Duncan or New York's Joel Klein.
These advocates have squared off against teachers' unions in a contentious debate among Democrats over whom Obama should choose. Unions, an influential segment of the party base, wanted a strong advocate for their members such as Obama adviser Linda Darling-Hammond, a Stanford University education professor.
Yet Duncan's nomination may please the unions, who have said Duncan seems willing to work with them.
"Arne Duncan actually reaches out and tries to do things in a collaborative way," Randi Weingarten, head of the 1.4 million-member American Federation of Teachers, said in an interview earlier this month.
Obama managed during his campaign to avoid taking sides in the debate, which centers on accountability and the fate of President George W. Bush's No Child Left Behind law. Duncan also has tried to appeal to both factions; he signed competing manifestos from each side earlier this year.
