Dugan, 63, a former bank regulator and former lawyer to the Citigroup board who became a Citigroup director last year, will succeed Mike O'Neill on Jan. 1, the company said. O'Neill recently reached the board's retirement age of 72 and was due to leave in April.
Citigroup CEO Mike Corbat, 58, had asked not to be considered, even though the chairman role has traditionally also been held by the bank's CEO.
Corbat is pushing the bank to reach 2020 financial targets he laid out last year after missing targets he set in 2013.
"I am confident in Mike Corbat and his team's ability to continue to improve returns for its shareholders," Dugan said in a statement.
Dugan was Comptroller of the Currency - the U.S. government agency that supervises national banks and federal branches of foreign banks - from 2005 to 2010.