It is understood that Lyons headed up a final shortlist to take the £140,000-a-year post heading up the BBC Trust, which has been without a chairman since Grade's departure to become ITV's executive chairman.
Lyons currently works at the Office of the Prime Minster and is chairman of the English Cities Fund and the City Of Birmingham Orchestra. He has close links to Gordon Brown, the Chancellor of the Exchequer and expected next Prime Minister, which has raised accusations of cronyism in the press.
He was previously chief executive of Wolverhampton, Nottingham and Birmingham city councils, where he was in charge of a £2bn budget.
Another contender for the role was believed to be Chris Powell, who chairs the Institute of Public Policy Research. Powell is the former chairman and chief executive of BMP DDB, who has now been ruled out of contention.
The role had previously been linked to Lord Puttnam, who ruled himself out at an earlier stage.
The BBC chairman is chosen by the Queen, after there has been a recommendation from the Department of Culture Media and Sport, headed by Tessa Jowell.
The preferred candidate then has to go through the final stage of being recommended by the Prime Minister.
Lyons said: "It is a great privilege to be appointed chairman of the BBC Trust. As the BBC's sovereign body, our duty is to ensure the public who pay for the BBC retain overall control of their BBC.
"As chairman I will never lose sight of the public's core expectations of editorial independence and quality programmes across television, radio and the internet which inform, educate and entertain. I look forward to the exciting challenges of the future and working with my colleagues on the trust to ensure the BBC provides a quality service to justify the public's continuing support."
Chitra Bharucha, vice-chairman and acting chairman since November 2006, said: "On behalf of all the Trustees, I am delighted to welcome Michael Lyons to the BBC Trust and congratulate him on his appointment as chairman. The trust has made important decisions in our first three months and significant challenges lie ahead. All of us look forward to working with Michael as we go forward."
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