Former FBI director Robert Mueller has been named special prosecutor into an investigation of "Russian government efforts to influence the 2016 presidential election, and related matters," the US Justice Department has said.
US intelligence agencies said earlier this year that Russia interfered in the US election.
"My decision (to appoint a special counsel) is not the finding that crimes have been committed or that any prosecution is warranted. I have made no such determination," Deputy Attorney General Rod Rosenstein said in a statement.
"I determined that a special counsel is necessary in order for the American people to have full confidence in the outcome," he said.
The leading Democrats in the House of Congress and the Senate have both welcomed the appointment.
House leader Nancy Pelosi said she was pleased be the appointment of a "respected public servant," while Senate leader Chuck Schumer said the appointment was "very much needed."
The announcement came after a small but growing number of Republicans called for an independent probe of possible collusion between President Donald Trump's 2016 campaign and Russia.
The tumult in Washington deepened over allegations Mr Trump had sought to end the FBI's investigation into ties between Mr Trump's first national security adviser, Michael Flynn, and Russia.
James Comey, whose firing as FBI director last week triggered a political firestorm, wrote a memo detailing Mr Trump's comments to him in February saying "I hope you can let this go, "referring to the Flynn probe, according to a source who has seen a memo written by Comey.
The Comey memo caused alarm on Capitol Hill and raised questions about whether Trump attempted to interfere with a federal investigation.
The White House denied the report, saying it was "not a truthful or accurate portrayal of the conversation between the president and Mr Comey."
Democratic politicians have demanded that the Justice Department name a special prosecutor to investigate potential ties between Mr Trump's campaign and Russia.
"If in fact what was in the memo is true, it's very concerning, and we need to get to the bottom of that," Republican Adam Kinzinger, a member of the House of Representative Foreign Affairs Committee, said on CNN.
I think we are in the position now where it's time for an independent commission or a special prosecutor or whatever
The latest developments have overshadowed the policy goals of Mr Trump's Republican Party in Congress, including major healthcare legislation and tax cuts.
US Senate intel panel wants more info from Comey
Representative Adam Schiff, the top Democrat on the House Intelligence Committee, said pressure was mounting on House of Representatives Speaker Paul Ryan to allow a vote on legislation creating an independent commission to take up the investigation.
Some legal analysts have said Mr Trump's possible pressure on Mr Comey to end the Flynn probe and his decision to fire the FBI chief in the midst of the agency's investigation of the Russia matter could amount to obstruction of justice, a charge that could be invoked in any attempt to impeach Trump and remove him from office.
Mr Schiff said impeachment is "not something to be lightly entertained. I think we follow the evidence, we obtain the evidence, we hear the testimony and then we decide just what does this show about the president's conduct."
But most Republicans have said the current FBI probe and investigations in the Republican-led Congress are sufficient.
