Ms Champion resigned earlier in the month after receiving criticism for writing an article, published in The Sun, in which she said “Britain has a problem with British Pakistani men raping and exploiting white girls”.
She later apologised for causing offence and for “the extremely poor choice of words in The Sun article”.
Ms Butler, the Brent Central MP, served as Jeremy Corbyn’s Shadow Minister for Diverse Communities before resigning in February in order to defy the Labour whip and vote against the triggering of Article 50.
She was re-appointed to the post in June following the General Election, in which she significantly increased her majority.
Ms Butler served as MP for Brent Central between 2005 and 2010 before losing her seat to the Liberal Democrats, winning it back in 2015.
She is on the left of the Labour Party and is seen as an ally of Mr Corbyn.
Announcing the appointment, Mr Corbyn said: “Dawn is a great champion for women, equality for all and our country's diverse communities. I look forward to working closely with her to advance our agenda of a truly equal society that works for the many not the few."
Ms Butler said: "I am honoured to accept this appointment and would like to thank Sarah Champion for all the hard work she has done in the role.
"Labour will tackle all forms of discrimination and the ways they interact.
"Equality is equality, you can't pick and choose. I have always fought for those who feel voiceless and I will fight to deliver real equality in our country."
Mr Corbyn said last week that Ms Champion had been right to resign from the post because she had been “wrong to designate an entire community as the problem” of sexual grooming.
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