Callahan was introduced Wednesday at a news conference at the team's Alameda, Calif., practice facility.
Like Gruden, his former boss, Callahan has no head coaching experience and moves up after serving as an offensive coordinator, a position he held with the Raiders for four seasons.
"I embrace this opportunity and embrace this challenge," Callahan said. "We have established a level of performance over the last two years that is reflective of our players' efforts."
Callahan, 45, followed Gruden to Oakland after serving as offensive line coach with the Philadelphia Eagles from 1995-97.
He spent his previous 15 seasons in the college ranks, working as offensive line coach at Wisconsin from 1990-94 after one season as offensive coordinator at Southern Illinois.
Callahan started his coaching career in 1980 as a graduate assistant at Illinois, then was promoted to a full-time position and coached tight ends, offensive line, quarterbacks and special teams through 1986.
A Chicago native, Callahan was a three-year starter as a quarterback at Illinois Benedictine, where he was an honorable mention NAIA All-American his final two seasons.
His hiring comes three weeks after Gruden left the Raiders witha year left on his contract to become coach of the Tampa Bay Buccaneers. Gruden received a five-year, $17.5 million contract while Oakland received first- and second-round draft picks this
year, a 2003 first-round pick, a 2004 second-round pick and $8 million in cash.
Gruden compiled a 40-28 record in four seasons with the Raiders, taking them to the AFC championship game last season.
Oakland won the AFC West in 2001 but lost to the eventual Super Bowl champion New England Patriots in a controversial divisional playoff game.
Days after the loss to New England, Gruden said he had no plans to sign a new deal with the Raiders.
"Immediately following Jon Gruden's departure to Tampa Bay, Bill was appointed the captain of the coaches," Oakland owner Al Davis said. "The coaches were told to operate as if Jon were here but
with Bill as the captain.
"We got calls from coaches, former coaches and assistant coaches but there was no one else that could have fit the way Bill Callahan could fit."
Gruden's departure did not deter Davis from signing a pair of free agents -- defensive tackle John Parrella and linebacker Bill Romanowski.
Davis said Wednesday that the announcement of Callahan's hiring was delayed by the team's pursuit of Parrella.