Ms Royal, 60, was the Socialist candidate for president in 2007 but lost to Nicolas Sarkozy.
She had four children with Mr Hollande in a relationship that lasted for more than two decades.
It has been reported that her relationship with Mr Hollande, 59, is “good”, and she has supported most of his government’s decisions.
The cabinet was named yesterday after discussions between Mr Hollande and the country’s new prime minister, Manuel Valls. The previous prime minister, Jean-Marc Ayrault, and his government resigned after the Socialists suffered in last week’s local elections, which saw big gains for conservatives and the far-right Front Nationale.
However, the Socialists still enjoy an overall majority in the lower house of the parliament, the National Assembly.
Laurent Fabius and Jean-Yves Le Drian keep their positions in foreign affairs and defence.
But former finance minister Pierre Moscovici has left the government and the brief has been split between two Socialists. Michel Sapin will take charge of finance and Arnaud Montebourg will be in charge of industry and economy.
Mr Valls is replaced as interior minister by Bernard Cazeneuve, who served as a junior minister responsible for the budget under Mr Ayrault.
Two Greens from Mr Ayrault’s cabinet resigned in protest against the appointment of Mr Valls. They said this was due to his hardline record on immigration and other issues.
Mr Hollande has become an unpopular figure in France, having failed to restore the country’s economy. The unemployment rate in France is now above 11 per cent, with the cost of living also soaring.
He has also become synonymous with a top rate of income tax of 75 per cent, but this week pledged his government would become more business friendly.
He said France had to put right its public finances, acknowledging it was time for change. He has proposed a reduction in taxes and worker contributions to spur job creation. “We are in this for the long haul,” he said.
The reshuffled cabinet’s first task will be to persuade the European Union that France is on track after the country again missed its deficit target, political analysts said.
With 16 ministers, not including the prime minister, this is the leanest cabinet in modern French history, with an equal number of men and women.
The only other newcomer is François Rebsamen, a Hollande loyalist, who was named labour minister.
It was yesterday claimed that Mr Hollande’s most recent official partner, Valerie Trierweiler, had opposed Ms Royal’s appointment to any position in the government.
Mr Hollande and Ms Trierweiler officially split up in January after it was reported in a French magazine that he had been having an affair with a French actress, Julie Gayet.
French daily newspaper Le Monde yesterday ran the headline “The revenge of Segolene Royal” on its web edition. And one French blogger wrote on Twitter: “Sego [Ségolène] nominated, break with Trierweiler complete.”