Himself a former KGB agent, Putin reunited the domestic and foreign security agencies into one, which is called the SVR.
Under the decree, Nikolai Patrushev, director of the counter-espionage service known as the FSB, gains the status of a cabinet minister.
The changes should make the agency more efficient by speeding up decision-making and clarifying the powers and responsibilities of officials and departments, said FSB Deputy Director Yevgeny Lovyrev.
FSB departments will be disbanded and replaced by units called services, whose leaders will have more authority than before, he said.
Anna Neistat, director of the Moscow office of Human Rights Watch, said news of the reforms sent shivers down her spine.
"As far as I can understand, this is a plan to reinstate the KGB," she said.
Former Russian president Boris Yeltsin disbanded the KGB in 1992.