Sessions, a former prosecutor, was turned down for a federal judgeship in 1986 because of alleged racist remarks.
Conservative Republican Mike Pompeo has been nominated as CIA director and retired Lt-Gen Michael Flynn has been appointed national security adviser.
Trump’s latest picks were praised on Twitter by David Duke, former leader of the white supremacist KKK group.
In a statement, Trump called Sessions a “world class legal mind”.
“Jeff is greatly admired by legal scholars and virtually everyone who knows him,” he added.
Sessions said in a statement that he “enthusiastically” embraced President-elect Trump’s vision for “one America and his commitment to equal justice under law”.
“I look forward to fulfilling my duties with an unwavering dedication to fairness and impartiality,” he said.
Sessions opposes any path to citizenship for undocumented immigrants and was an enthusiastic backer of Trump’s pledge to build a wall on the border with Mexico.
In 1986, Sessions was nominated by then-President Ronald Reagan for a federal judgeship, but was rejected because of allegations that he had made racist remarks.
He strongly denied the claims.
