Trump responded by once again denying any links to Moscow, but the appointment of a special counsel with sweeping powers dramatically raises the stakes in a crisis threatening to paralyze his presidency.
The Republican leader, who has struggled to shake off suspicions that Russia helped put him in the White House, has been accused of seeking to block the investigation by sacking FBI chief James Comey.
Under pressure to provide guarantees to Congress and the public that the Russia probe will continue unhindered, Deputy Attorney General Rod Rosenstein tapped Robert Mueller -- a widely-respected figure who headed the FBI for the decade after the 9/11 attacks -- to take over the reins.
"Based upon the unique circumstances, the public interest requires me to place this investigation under the authority of a person who exercises a degree of independence from the normal chain of command," Rosenstein said in a statement.
A New York-born Vietnam war vet, Mueller has a reputation as a tough lawman who once even stood up to a president.
He will head up the FBI's ongoing probe of "Russian government efforts to influence the 2016 presidential election and related matters," with the authority to prosecute crimes unearthed by the investigation.
Trump reacted swiftly, without directly commenting on Mueller's appointment.
"As I have stated many times, a thorough investigation will confirm what we already know -- there was no collusion between my campaign and any foreign entity," he said in a tersely-worded statement.
"I look forward to this matter concluding quickly."
Capping days of political drama in Washington, Mueller's appointment came as Trump fends off a stunning series of allegations including claims he shared US secrets with Russian officials in the Oval Office.