Mr Hain succeeds Keith Vaz, who leaves the Government on grounds of ill-health and after the controversy over his financial affairs.
Government sources said Mr Hain's skills as a good communicator would be useful if Mr Blair decides to call a referendum on the single currency.
Mr Hain is regarded as a pragmatist on Europe rather than a fully paid Europhile. Although he voted against the Maastricht Treaty, which paved the way for the single currency, he now supports membership of the euro in principle.
Mr Blair believes that he would make a formidable team with Jack Straw, the new Foreign Secretary, in a single currency referendum. He believes they would carry more conviction in campaigning for a Yes vote because of their pragmatic approach to Europe.
The post of Europe Minister is seen as the most important position in the Government outside the Cabinet. Mr Blair has previously appointed three people to the post, all of whom have failed to make their mark in the way he hoped Doug Henderson, Joyce Quin and Mr Vaz.
Mr Hain's move is a surprise because he returns to the Foreign Office only four months after being moved out of it to become Energy Minister. Some insiders believed he was switched because of his opposition to US President George Bush's "son of Star Wars" programme. But Mr Blair assured Mr Hain he wanted him to gain experience in a domestic brief and has now been true to his word.
In a sweeping reshuffle of the Government's junior and middle ranks last night, the Prime Minister promoted several Blairities and left his own stamp firmly on his new team. He also appointed more women to the Government's ranks.
They include Barbara Roche, who is promoted from the Home Office to become Minister of State at the Cabinet Office, which will have a strong team under John Prescott which will act as Mr Blair's "enforcers" throughout Whitehall.
Lord Macdonald of Tradeston, the former Transport Minister, becomes Mr Prescott's deputy as Chancellor of the Duchy of Lancaster. In 40 years Gus Macdonald has moved from Trotskyite agitator to Downing Street's inner circle. On the way he has picked up a fearsome reputation as a hard-nosed businessman with a multi-million pound fortune. The son of a stevedore and cleaner, he left school at 14 to become a marine fitter and Young Socialist activist.
The other appointments to Mr Prescott's team are Sally Morgan, Mr Blair's political secretary, who is made a peer, and Christopher Leslie, MP for Shipley.
The reshuffle included some unexpected political comebacks. Harriet Harman, who was sacked as Social Security Secretary in 1998, returns as Solicitor General, while Alun Michael, who gave up his Cabinet post to become First Secretary in Wales, is rewarded for his loyalty by being appointed Minister of State for Rural Affairs. Nigel Griffiths, a close ally of Gordon Brown and former Consumer Affairs Minister, returns to his old department and Lord Rooker, the former Pensions Minister, takes charge of the sensitive issue of asylum and immigration at the Home Office. Paul Boateng, a Home Office Minister, moves to the Treasury as Financial Secretary. He will be joined at the Treasury by Ruth Kelly, promoted from the backbenches to become Economic Secretary.
Other MPs promoted from the backbenches include Stephen Twigg, who defeated Michael Portillo in Enfield Southgate at the 1997 election and increased his majority last week; Hilary Benn, the son of Tony Benn, who becomes a junior minister at the International Development Department; Sally Keeble, who joins the Department for Transport, Local Government and the Regions; Hazel Blears, who moves to the Department of Health and Ivan Lewis, who joins the Education and Skills Department.
Two pro-European backbenchers, Denis MacShane and Ben Bradshaw, both former journalists are made junior ministers at the Foreign Office.
Lord Falconer of Thoroton, Mr Blair's former flatmate and close friend, moves sideways from the Cabinet Office to become Minister for Housing and Planning to gain more experience before his possible elevation to the Cabinet. Baroness Symons, the first woman minister at the Ministry of Defence, switched to become Trade Minister, a post which has been split for the first time between the Foreign Office and the Department of Trade and Industry.
Another Blairite, Margaret Hodge, is promoted within the Department of Education and Skills, where she will be responsible for universities. Stephen Timms moves from the Treasury to become Schools Minister. Richard Caborn, a close ally of Mr Prescott, leaves the DTI to become Sports Minister, replacing Kate Hoey, who has been sacked. Others leaving the Government include Ms Quin and Baroness Hayman, both Agriculture Ministers, and Chris Mullin.
Downing Street said: "The best people outside the Cabinet are in the key minister of state posts. They are focusing very much on the delivery of improved and effective public services." Mr Blair's spokesman added that the Prime Minister was keen to promote "the best of the 1997 intake of MPs."
Lord Falconer of Thoroton
The arch-Blair crony has proved his tenacity as the public face for the Millennium Dome debacle and now becomes Minister for Housing and Planning.
Key faces in the new Government
A former chairman of the Bar, the new Attorney General has established liberal credentials by creating a Pro Bono unit to encourage lawyers to take cases for nothing.
The former anti-Apartheid activist who previously held the Africa brief returns to the Foreign Office to replace Keith Vaz as the Minister for Europe
After her unhappy spell as Secretary of State for Social Security Secretary, she makes a surprise return to the fold, this time as Solicitor General.
Lord MacDonald of Tradeston
Once a Trotskyite activist, he earned a fortune in the media and became a Transport minister before following John Prescott to the Cabinet Office.
Tony Blair's fiercely loyal political secretary is catapulted into Government, joining the Cabinet Office team detailed to drive through public sector reforms.
The daughter of Jewish immigrants held the sensitive position of Home Office minister responsible for asylum and now becomes Minister of State in the Cabinet Office.
Baroness Symons of Vernham Dean
The first female minister at the Ministry of Defence, she has helped to liberalise the armed forces while navigating sensitive issues. She now becomes Minister for Trade.
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