Mullally, 63, also becomes the ceremonial head of some 85 million Anglicans worldwide, who are divided between conservative Christians, especially in Africa, where homosexuality is outlawed in some countries, and their generally more liberal counterparts in the West.
GAFCON, a grouping of conservative Anglican churches across Africa and Asia, immediately criticised Mullally's appointment on Friday, saying it showed the English arm of the church had "relinquished its authority to lead".
Mullally, who has served as Bishop of London since 2018, has previously championed several liberal causes within the church, including allowing blessings for same-sex couples in civil partnerships and marriages.
Reforms introduced 11 years ago made it possible for a woman to hold the office.
By being named as the 106th Archbishop of Canterbury, Mullally becomes the female leader of one of the last areas of British public life to have been led only by men.
Accepting her appointment on Friday, Mullally said she wanted to bring people together to find "hope and healing".
"I want, very simply, to encourage the church to continue to grow in confidence," she said in her first statement as archbishop.
"I look forward to sharing this journey of faith with the millions of people serving God and their communities in parishes all over the country and across the global Anglican Communion."
Mullally is a former cancer nurse who worked as England's chief nursing officer in the early 2000s.
She has advocated for creating an open and transparent culture in churches that allows for difference and disagreement.
"There are great commonalities between nursing and being a priest. It's all about people, and sitting with people during the most difficult times in their lives," she once told a magazine.
She was ordained as a priest in 2002 and became one of the first women to be consecrated as a bishop in the Church of England in 2015.
Mullally sits in Britain's unelected upper house of parliament, the House of Lords, and has spoken on issues including the cost-of-living crisis, healthcare, and social justice.
Mullally will be installed in a service at Canterbury Cathedral in March 2026.
Reflecting the Church of England's status as England's established church, Prime Minister Keir Starmer's office announced Mullally's appointment on Friday with the formal consent of King Charles.
"The Archbishop of Canterbury will play a key role in our national life. I wish her every success and look forward to working together," Starmer said in a statement.
As monarch, Charles is the Supreme Governor of the Church of England, a role established in the 16th century when King Henry VIII broke from the Catholic Church.
The Church of England has been without a leader since last November when Justin Welby resigned over a child abuse cover-up scandal.
Mullally is married to Eamonn and has two adult children.
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