Obama said the office would work with nonprofit organizations "both secular and faith-based" and would help them determine how to make a bigger impact in their cities, learn their obligations under the law and cut through government red tape.
In a time of economic crisis, the president said, it was important for the government to help distressed Americans but added that "the change that Americans are looking for will not come from government alone."
Obama said the top priority of the White House Office of Faith-Based and Neighborhood Partnerships will be "making community groups an integral part of our economic recovery and poverty a burden fewer have to bear when recovery is complete."
To lead the office, Obama appointed Joshua DuBois, a 26-year-old Pentecostal minister who headed religious outreach for Obama's Senate office and his presidential campaign. He also named 25 religious and secular leaders to a new advisory board.
"The big picture is that President Obama believes faith-based and smaller secular neighborhood organizations can play a role in American renewal. They can work with the federal government to address big problems," DuBois said in an interview with The Associated Press. "We're also going to make sure we have a keener eye toward the separation of church and state."
Obama said the office would also work to reach out overseas "to foster interfaith dialogue with leaders and scholars around the world."
Obama's order expanded and redefined a similar office established by President George W. Bush. Focused primarily on faith-based initiatives, the Bush office sparked constitutional questions about whether the separation of church and state would be preserved, particularly if groups receiving tax dollars sought to hire on the basis of religion.
Groups that were critical of the Bush faith-based office - including the American Civil Liberties Union, Americans United for Separation of Church and State, and People For the American Way - issued statements Thursday expressing disappointment in the Obama version. All said that by failing to repeal Bush policies, the White House will allow participating religious groups to continue discrimination in hiring.
The ACLU also charged that the new advisory council amounted to "a president giving his favored clergy a governmental stamp of approval."
Before signing the order at the White House, Obama told the annual National Prayer Breakfast that the program would not show favoritism to any religious group and would adhere to a strict separation of church and state.
Addressing the gathering of lawmakers, dignitaries and world leaders, Obama spoke of how faith has often been a divisive tool, responsible for war and prejudice. But, he said, "there is no religion whose central tenet is hate."
"There is no god who condones taking the life of an innocent human being," he said, and all religions teach people to love and care for one another. That is the common ground underlying the faith-based office, he said.
Obama's advisers want to be certain tax dollars sent to the faith-based social service groups are used for secular purposes, such as feeding the hungry or housing the homeless, and not for religious evangelism. The administration doesn't want to be perceived as managing the groups yet seeks transparency and accountability.
Obama pledged during the campaign to allow taxpayer-funded religious institutions to hire and fire based on religion - but only for the activities run on private funding.
"There is no one-size-fits-all answer to this hiring problem," said Ira C. Lupu, a professor at the George Washington University School of Law. "It might be at the end of the day, faith-based hiring is going to be allowed in some government-funded programs and not in others."
Obama on Thursday asked White House lawyers and the Justice Department to write a policy that would address the question of hiring.
"There is a pretty clear lack of legal clarity and data in this area. This mechanism allows us to explore those areas on a case-by-case basis and find out exactly where things are," DuBois said.
The Rev. Frank Page, a past president of the Southern Baptist Convention and a member of the advisory council, said he was pleased that religious groups at least for now will be able to make hiring decisions based on faith, and hopes the practice will become permanent.
"I don't believe that federal money should be used for proselytizing," Page said. "But if the funds are being used to help the hurting, the homeless, the hungry, then I think it's appropriate to let the faith-based organizations be true to their own convictions in who they hire and don't hire."
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