"I wanted to appoint someone who I believed would represent the values Montanans hold important," said Bullock, a Democrat, in announcing his decision.
Walsh said he will travel to Washington, D.C., on Monday and will be sworn in the next day. He said he would not be "sucked in" to the political culture of Washington.
"There are too many politicians who put their own political agendas ahead of doing what's right, too many folks who don't take their responsibility seriously," Walsh said.
Walsh spent less than one year as lieutenant governor, his first elected office, before announcing his candidacy for Baucus' Senate seat.
The Senate confirmed Baucus on Thursday as the ambassador to China with a 96-0 vote. Baucus has served in the Senate for 35 years, and he announced last year that he would not seek another term.
Walsh will serve the remainder of Baucus' term, which ends in January 2015.
Bullock's choice had been the subject of speculation since Baucus was nominated for the ambassadorship in December. Would the governor appoint Walsh, the candidate he had already endorsed in the election this year, or would he pick a caretaker appointee who had no interest in running for the seat?
The governor said he ended up choosing the person he believed would be most effective.
State law leaves the decision of an interim appointment to the governor, without any mention of how to go about doing it. Bullock had spent weeks deflecting questions about Baucus' replacement, calling it a "hypothetical" situation until there is actually a vacancy.
Even after Republican legislative leaders asked Bullock for transparency in the selection process, Bullock kept a tight lid on his choice, saying only the person "will represent the interests of all Montanans."
Montana Republican Party Chairman Will Deschamps on Friday called the Walsh appointment a "backroom deal" that put politics ahead of what is right for the state.
Walsh has come under fire recently amid reports that he was reprimanded in 2010 by the U.S. Army for pressuring Montana National Guard troops to join the National Guard Association of the United States, a private association for which he was seeking a leadership position. In response, Walsh released more than 400 pages of his military records and said what he did was for the good of the Guard.
Besides Walsh, political newcomer Dirk Adams and former Lt. Gov. John Bohlinger also are running for the Democratic nomination.
Walsh raised $583,113 in the final three months of 2013 for his campaign, outpacing Adams' $102,975 — $71,000 of which came from Adams himself, Bohlinger brought in $10,000 in donations, plus another $10,000 of his own money.
Daines is the early front-runner for the Republican nomination and has raised more money than all the other candidates, with more than $1 million in the final three months of 2013.