The return of Mandelson, the European Union trade commissioner, was a surprise given a history of rows between him and Brown, and his preference for the policies and leadership of Brown's predecessor, Tony Blair.
But it was clearly intended to strengthen Brown's position within his Labour Party at a time when the prime minister is lagging in the polls and determined to show voters he is the right man to lead the country.
Mandelson will be business minister and is expected to play a central role in a newly-created economic council that will meet twice a week to frame policies and help people cope with the fallout from the economic crisis.
"The new era that we have entered requires new ways of governing," Brown told a news conference. "These are new times. The global economy will never be the same again."
Twice a cabinet minister under Blair, Mandelson also quit twice under a cloud and some Labour members said he was such a divisive figure that Brown's bold and surprising move may not go down so well with the British public.
Brown and Mandelson have had many spats in a relationship going back 20 years. Initially close, the relationship soured after Mandelson backed Blair for the Labour leadership in 1994.
Speaking to reporters in Downing Street, Mandelson said Brown was doing an "exceptionally good job" and he was proud to have been asked to work in his government.
"Our economy, like every other, is facing a very hard challenge as a result of the global financial crisis and in a sense it's all hands on deck," Mandelson said.
Public support for Brown, who served as finance minister for a decade under Blair, slumped earlier this year to leave Labour 20 points behind the opposition Conservatives and on course for a wipeout at the next general election, due by May 2010.
But Brown, 57, has seen support improve in recent weeks as voters worry about the untested Conservatives' ability to handle a crisis. While still trailing, Brown has cut the deficit in the polls to around 10 points.
A key architect of Blair's New Labour project that moved the party to the centre of British politics, pro-business Mandelson said in an interview this week the party must stay true to that ideal and avoid a drift back to the Left.
Experienced Double Act
With economists saying Britain entered recession in the third quarter for the first time since the early 1990s, Brown needs to reassure the public he is the man to steer the country through the economic turmoil before the election.
The decision to create a special council on the economy, similar to one that handles terrorism and security threats, was expected. The group includes captains of industry from banks, mining, retail and telecommunications companies.
The outlook for Britain's economy worsened on Friday as a survey showed its services sector contracted at the fastest rate for at least 12 years and bellwether retailer John Lewis reported a plunge in sales.
Brown and Mandelson "will be a double act in a way, contrasting themselves with what they will say is the inexperience of the Conservative opposition," said Phil Collins, Blair's former speech writer.
Mandelson was nicknamed the "Prince of Darkness" in Britain for the behind-the-scenes role he played in reinventing Labour, which overturned years of Conservative rule with a landslide victory in 1997. Labour has been in power since.
"The best thing you can have in life is a good plotter on your side, and he's clearly committed himself to the prime minister and to the government," said David Blunkett, a former Labour interior minister.
In other appointments, Brown created a new energy and climate change ministry under staunch ally Ed Miliband. The leader of the House of Lords, Catherine Ashton replaced Mandelson as EU trade commissioner.
