David Friedman, a bankruptcy lawyer, supports settlement expansion in the occupied West Bank, characterised by succesive US administrations as an "obstacle to peace" with the Palestinians.
"Friedman's appointment is good news for Israel," deputy foreign minister Tzipi Hotovely said in a statement.
Friedman -- a Trump campaign adviser -- backs moving the US embassy in Israel to Jerusalem, contrary to Washington's longstanding policy of basing its ambassador in Tel Aviv.
"His positions reflect the will to strengthen the status of Israel's capital, Jerusalem, at this time and an understanding that the settlements have never been the real problem in the region," Hotovely wrote.
In a Trump transition team statement Thursday announcing his appointment, Friedman said he wanted to work for peace and looked forward to "doing this from the US embassy in Israel's eternal capital, Jerusalem."
The United States and most UN member states do not recognise Jerusalem as Israel's capital and the city's status is one of the thorniest issue of the decades-long Israeli-Palestinian conflict.
Israel captured Arab east Jerusalem in the Six Day War of 1967 and subsequently annexed it in a move never recognised by the international community.
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The Palestinians claim it as the capital of a future state.
The Yesha council, which represents the more than 400,000 Israeli settlers in the West Bank, praised the new ambassador-designate.
"Friedman has a deep love for all of the land and people of Israel, including those in Judaea and Samaria," the group's foreign affairs spokesman Oded Revivi said in a statement on Friday, using the biblical term by which the Israeli right describes the West Bank.
"His knowledge and wisdom of the issues will strengthen the bridge between our great nations."
Less welcoming was the left-wing Israeli daily Haaretz.
"By Israeli standards, Donald Trump's designated Ambassador to Israel, David Friedman, is an extreme right-winger," it commented.
"He makes (Israeli Prime Minister) Benjamin Netanyahu seem like a left-wing defeatist."
Netanyahu's coalition government is seen as the most right-wing in Israel's history.
The Palestinian government has so far not formally responded, though Saeb Erekat, secretary general of the Palestine Liberation Organisation, was due to address journalists on Friday evening.