Kan was chosen during a meeting of the Democratic Party of Japan.
Kan collected 291 votes in the country's lower house of Parliament, besting the 129 votes cast for Shinji Tarutoko, chairman of a parliamentary environment policy committee, the Asahi Shimbun reported.
The 63-year-old Kan announced his candidacy Wednesday, one day after Yukio Hatoyama resigned over broken campaign promises.
Kan now will go through the formal process of being appointed by Emperor Akihito.
The Cabinet has resigned so the new prime minister could appoint a new Cabinet, The New York Times reported.
Before Friday's party vote, Kan pledged to redirect the party to its goal of ending Japan's two-decade stagnation by tackling two key problems facing the country: its dismal growth rates and its ballooning public debt.
"I hope to carry over the torch of rebuilding Japan passed on to me by Hatoyama, and carry out those reforms," Kan said.