Mr Grenell, 53, who has no relevant background or top-level management experience, will supervise 17 agencies including the CIA.
“He is committed to a non-political, non-partisan approach as head of the Intelligence Community, on which our safety and security depend,” White House press secretary Stephanie Grisham said in a statement on Thursday.
MrGrenell said on Twitter he would not serve permanently and that Mr Trump would “soon” select someone else.
Mr Trump has declined to hire a permanent replacement for Dan Coats, who stepped down as DNI in August after standing firm on the intelligence community’s conclusion that Russia interfered in 2016 to back Trump over Hillary Clinton.
Mr Grenell has previously cast doubt on the extent of Russia’s efforts, saying that Moscow’s activities were nothing new.
Senator Ron Wyden, a Democrat on the intelligence committee, accused Mr Trump of prioritising “unquestioning obedience over the safety of the American people.”
Mr Grenell has cheered on the rise of right-wing populists in Europe, including hailing Austria’s ultra-conservative chancellor, Sebastian Kurz, as a “rock star.”
He has been unusually outspoken for an ambassador in criticising the country where he serves, including warning German companies over Twitter to comply with Mr Trump’s orders not to do business in Iran.
Ned Price, a former aide to president Barack Obama, said Mr Trump “has dropped the charade that he has any use for intelligence.”
“He has just named the most political – and abrasive – US ambassador to what it supposed to be the least political – and undoubtedly delicate – role,” he wrote on Twitter.