Panetta announced this week he was retiring as secretary of defense. He served for 16 months as CIA director before taking his current position.
Obama on Monday announced his nomination of Hagel, R-Neb., a Vietnam War veteran, to take Panetta's place.
"I believe his experience, his judgment (and) his deep understanding of the security issues facing this country make him the right choice to be secretary of defense," Panetta said in a statement.
Critics of Hagel, co-chairman of the president's Intelligence Advisory Board, have taken issue with his opposition to some Iranian sanctions and positions regarding U.S.-Israeli relations.
Obama lauded Hagel's record as a lawmaker, businessman and strategic leader.
"Chuck knows that war is not an abstraction," Obama said. "He understands that sending young Americans to fight and bleed in the dirt and mud, that's something we only do when it's absolutely necessary."