Dallaglio, 31, fills a job vacated by World Cup skipper Martin Johnson, who recently announced his retirement from international rugby.
Other captaincy candidates would have included Phil Vickery, Richard Hill and Neil Back, but England head coach Sir Clive Woodward has turned to a player who he first appointed captain after he became red rose boss in September 1997.
Woodward said of Dallaglio's appointment: "I was in the fortunate position of having a lot of outstanding players to consider for the captaincy role to follow in the footsteps of Martin Johnson, who was always going to be such a hard act for any player to follow, both on the pitch and in his leadership qualities.
"Many players have proven to me they could do the job, but in my opinion, Lawrence is the stand-out choice for Italy.
"I am really pleased for him, and I am confident he will be excellent in the role. As always, I will be appointing the captain on a game-by-game basis, a philosophy I've maintained since I've been in charge."
Dallaglio described the captaincy job as "a huge honour".
"I am very pleased to accept this responsibility," said Dallaglio.
"It is a huge honour and privilege, and Martin has certainly set a high standard. He is a world-class player, and is a great loss to England, but I respect his decision to retire.
"All teams move on and evolve, and England is no exception.
"The priority is to get selected on form, that's paramount. I see playing well as the key to success, and captaining your country is very special indeed."
Dallaglio, capped 65 times, has led England 14 times. His last game at the helm was against South Africa at Twickenham in December 1998.