Diplomats said the list of 22 ministers indicated compromise on the politically sensitive positions of intelligence, foreign affairs and defence but promised change on domestic issues.
"It points to Khatami pressing for discreet but important changes on the domestic scene, particularly in regard to social policy, while leaving foreign security matters in the hands of his more conservative opponents," said one diplomat.
President Khatami submitted his cabinet choices to the Iranian parliament or Majlis in his first key test in office. His ability to put in place a cabinet of his own choosing is seen as vital to the reforming scope of his four-year administration.
The moderate Shia Muslim clergyman named ambassador to the United Nations Kamal Kharrazi to take over from Ali Akbar Velayati as foreign affairs minister. Hossein Namazi was chosen for the economy and finance portfolio, Bijan Namdar Zanganeh switched to the oil ministry from energy, Qorbanali Dorri Najafabadi was named to head intelligence, and navy chief Rear-Admiral Ali Shamkhani to defence.
One diplomat said the nominations for the three central posts of foreign affairs, intelligence and defence would be accepted quickly by parliament's hardliners: "Each of them stands for the status quo, promising little change in the short term."
Mr Kharrazi is seen as a loyal technocrat who would be unlikely to initiate major changes in foreign policy, particularly in Iran's hostile relations with the United States or the European Union.
He was in charge of war propaganda during the 1980-88 Iran-Iraq War. If confirmed, he would step into the shoes of Mr Velayati, a soft-spoken paediatrician who has been the voice of the Islamic republic in world capitals since December 1981. The nomination of Mr Najafabadia, a conservative cleric and parliamentary deputy at intelligence, was another important concession by the moderate president to his hardline opponents.
Changes were expected from President Khatami's nominees at domestic ministries, however, particularly with the potentially controversial choice of Ataollah Mohajerani as minister of culture and Islamic guidance. Mr Mohajerani has faced increasing criticism from conservatives, being labelled as a "liberal" after he advocated direct talks with the arch-enemy the US in 1990 and pressed for more cultural freedoms.
"Khatami has sent a signal that he will honour his election mandate of bringing social justice and civil law," said a Western diplomat, who expected the parliament to challenge Mr Mohajerani's position.
Abdollah Nouri, nominated for the interior ministry, held the same post between 1990-1994. He is noted as a member of a left-wing clerical association. "He is a reformist who will work like a bulldozer. He will bring changes to most of the provincial governors and mayors and will have a crucial role in the next parliamentary elections," the diplomat said.
Three of the 22 ministers proposed retained portfolios they held under former president Akbar Hashemi Rafsanjani. They are Issa Kalantari at Agriculture, Hossein Kamali at labour and social affairs, and justice minister Esmail Shoushtari. Two ministers proposed in the new cabinet were also carried over from Rafsanjani's team but were given new portfolios - new oil minister Mr Zanganeh, and Gholamreza Shafei, who switched to the industry portfolio from cooperatives.