He replaces former England wicketkeeper Warren Hegg, who relinquished the position he held for three years after Lancashire were relegated from the First Division last month.
"It's a great honour to be offered the captaincy of Lancashire. I am looking forward to working alongside the management team to further our success," said Chilton.
Chilton, 28, made his Red Rose debut in 1997 and averaged 32.36 in 16 championship matches in 2004. He was the county's only ever-present in all competitions.
Hegg, who has spent 19 seasons with the county, now intends to continue as a player under new skipper Chilton.
"It has been a great honour but now the time is right to step down and concentrate on helping the team recapture its position in Division One. The new captain will have my 100 percent support and commitment," said Hegg.
Former Australia batsman Stuart Law, who the county hope will earn British citizenship this winter, will be vice-captain.
Meanwhile, Nottinghamshire's South African-born batsman Kevin Pietersen confirmed that he has turned down a lucrative new contract with the English county cricket side.
The 24-year-old averaged more than 50 in the county championship in each of his four seasons at Trent Bridge but has now decided it is time to move elsewhere.
"We offered him a new three-year deal on a considerable salary which would have maintained his status as one of the highest-paid players at the club but he has chosen not to accept it," director of cricket Mick Newell said.
"It's very disappointing because from a pure cricket point of view, I can't see what else we could have done to make him stay."
Pietersen has been with the county since 2001, after being brought to English cricket from KwaZulu-Natal by former manager Clive Rice.
He played under his British passport, which he qualifies for through his mother, and this month reaches the end of the residency period required to become eligible for England.