Mr Elop, the head of Microsoft's Business Division, will take over as Nokia chief on September 21, the company said in a statement on Friday.
Mr Kallasvuo will resign his position on Nokia's board of directors, but continue to chair the Board of Nokia Siemens Networks in a non-executive capacity.
"The time is right to accelerate the company's renewal; to bring in new executive leadership with different skills and strengths in order to drive company success," said Jorma Ollila, Nokia's chairman and former chief executive.
Speculation over the potential departure of Mr Kallasvuo has been rife this year, as the world’s largest mobile-phone maker has struggled in the face of the growing smartphone market.
Since Apple introduced the iPhone three years ago, changing the mobile-phone industry with thousands of applications, Nokia shares have slumped more than 60pc.
The company has yet to develop a smartphone with the same mass appeal and has been forced to cut prices, sacrificing profits to defend its shrinking market share.
"The mobile phone market has changed tremendously over the past 10 years. It's no longer a handset, it's now more about services and operating systems," Hannu Rauhala, a senior equities analyst for Pohjola Bank, told AFP.
He said the appointment of Mr Elop was an acknowledgement by Nokia that its leadership should change to reflect the fact that its product and the entire mobile phone industry had also drastically changed. "I see that they are now looking for a more software-oriented leader," Rauhala added.
Nokia shares rose as much as 49 cents, or 6.3pc, the biggest intraday jump since May 10, on the news and was trading up 5pc at €8.10 by lunchtime in Helsinki.
Mr Elop said: "I am extremely excited to become part of a team dedicated to strengthening Nokia's position as the undisputed leader of the mobile communications industry."
Mr Elop joined Microsoft from network infrastructure company Juniper Networks in January 2008, where he was the chief operating officer.
Mr Kallasvuo has been with Nokia for more than 30 years. He became chief excutive in 2006 when Jorma Ollila stepped down. He has served on the board of directors since 2007.
"The whole Board of Directors joins me in thanking Olli-Pekka for his 30 years at Nokia, during which he has been deeply involved in developing the company and its operations," Mr Ollila said.
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