Political analysts said Peevski's appointment was another example of subjecting Bulgarian state institutions to private interests and could worsen the negative international reputation of the European Union's poorest country.
"I am shocked. This is the most scandalous appointment of a person who is known for connections to certain business groups," said Sofia University political analyst Rumiana Kolarova.
Post-communist governments in Bulgaria have failed to cut mutually advantageous links between politicians and businessmen, deterring foreign investment and keeping the Balkan country under strict EU monitoring and outside its passport-free travel Schengen zone ever since its 2007 admission to the bloc.
President Rosen Plevneliev cancelled his participation in a ceremony opening a new bridge to Romania on Friday and called an extraordinary sitting of the national security council next week to discuss Peevski's appointment, signalling his disapproval.
Some leaders of the mass protests that toppled the previous government in February left a meeting with Prime Minister Plamen Oresharski and called for new demonstrations, calling the appointment "a mockery" of their demands for more transparency.
Oresharski defended parliament's decision, saying Bulgaria needed to take serious steps to stop organised crime and smuggling and Peevski was best suited for the job - although he lacks direct experience in the field.
"Peevski was chosen because he is not part of the system and we deliberately looked for such an external specialist so that he can restructure it," Oresharski told reporters.
In 2007, Peevski was sacked as a deputy minister of the then-Socialist-led administration in a corruption scandal. But the investigation against him was later dropped and he was reinstated in the post.
Bulgarian media said Peevski stood behind a powerful network of national newspapers and television channels owned by his mother and which had been previously criticised for concentrating media ownership in the hands of a few.
The opposition centre-right GERB party demanded new elections, saying parliament's decision was "ridiculous" and that it would undermine the trust of Western security services with which Sofia cooperates.
Plevneliev signed the legislation removing the power of his office to appoint security chiefs, saying putting this in parliament's hands would ensure more debate and transparency when choosing such senior officials.
