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Dame Patsy will replace Sir Jerry Mateparae whose five-year term ends on August 31, becoming the third woman to hold the post.
"I am delighted Dame Patsy accepted the role," says Mr Key. "She is a passionate New Zealander, a well-respected businesswoman and a staunch supporter of our creative sector.
"She is thoughtful, articulate and has a brilliant legal mind. I am sure New Zealanders will be proud to have her as our Governor-General."
Former Auckland Mayor Dame Catherine Tizard was the first woman Governor-General, from 1990 to 1996.
Former Judge Dame Silvia Cartwright had the job from 2001 to 2006.
As a constitutional monarchy, New Zealand's head of state is the Queen and the Governor-General is her representative in New Zealand.
Dame Patricia has a low public profile but has made her name in corporate governance, serving on private and public sector company board over the past 20 years.
She also has a strong involvement in the arts and is the current chair of the Film Commission.
Most recently she worked on the review of the intelligence agencies with former Deputy Prime Minister Sir Michael Cullen.
Her salary will be $348,000 per year.
He husband is former lawyer and former Judicial Conduct Commissioner Sir David Gascoigne. He is a former chairman of law firm Watts and Patterson which became Minter Ellison Rudd Watts. Dame Patsy worked at Minter Ellison too.
The couple will have two official residences, one in Wellington and one in Auckland.
They will be required to host visiting heads of Government and to represent New Zealand overseas.
Occasionally they will host members of the Royal Family visiting New Zealand.
They will also be expected to travel extensively around New Zealand and engage with communities and interest groups.
Dame Patsy's term will begin on September 14.
Mr Key said New Zealand was well regarded for gender equality, having been the first country to give women the vote.
"Dame Patsy's appointment sends a strong message about New Zealand valuing women in leadership roles."
Mr Key said it had been a privilege to work alongside Sir Jerry Mateparae.
"I would like to thank Sir Jerry for his dedication and service in his role as Governor-General and wish him and Lady Janine all the very best for the future."
There would be a State farewell for Sir Jerry Mateparae on August 24, 2016.
Labour leader Andrew Little welcomed Dame Patsy's appointment.
"Dame Patsy has already made a significant contribution to New Zealand over her career in law, business and charitable organisations. I am confident she will be well suited to the role.
"I acknowledge Sir Jerry Mateparae's time as New Zealand's vice-regal which he has carried out in a typically relaxed and respectful Kiwi way. He leaves a fine legacy for Dame Patsy."
Dame Patsy (61) recently worked with Sir Michael Cullen on the review of the legislation related to New Zealand's intelligence agencies.
She has practised as a lawyer, been a law lecturer at Victoria University and is well regarded for her work as a professional director.
At a press conference this morning in the Beehive, Mr Key said Dame Patsy was a "thoughtful and articulate woman" who had a "brilliant legal mind".
He said it was important to have a woman in the role following two male Governors-General, but it was Dame Patsy's skills which secured her the job.
Dame Patsy said that she was "stunned" when she was asked by Mr Key to take on the job. She felt she "didn't really fit the mould" of Governor General.
But after considering it further and discussing it with her husband, she decided to take on the job.
"The opportunity for me to serve as Governor General is a great honour and a privilege."
She described herself as a proud and patriotic New Zealander.
"This was not a role that I ever imagined I might hold," she said.
"I have always admired the stature and the fine legacies of our Governors-General. But their previous careers have been largely dedicated to public service - either members of the judiciary, military, church and politics."
Dame Patsy said she considered what she could bring to the role and whether she could fulfil the expectations of the office.
"After all I was a strong supporter of the Girls Can Do Anything campaigns in the 70s and 80s."
She said she had been fortunate to have a wide range of jobs.
"This has enabled me to see the best of New Zealand, and it's given me a strong sense of optimism for our future."
A statement released on behalf of the Queen said Her Majesty was pleased to approve the appointment of Dame Patsy.
The Governor-General, Sir Jerry Mateparae, welcomed the news of the appointment.
"I congratulate Dame Patsy on this wonderful opportunity to represent Her Majesty the Queen in New Zealand, and equally, to represent New Zealand and New Zealanders to the world. Dame Patsy will bring an impressive range of skills, experiences and personal qualities to the office."
There will be a State farewell for Sir Jerry, hosted by the Prime Minister, on August 24, with Dame Patsy to take office at a ceremony on September 14.
She was made a Dame in 2014.
Her husband is former Judicial Conduct Commissioner Sir David Gascoigne.
The pair are Wellington-based but also have a property in the Wairarapa and are neighbours of film director James Cameron.
Prime Minister John Key confirmed yesterday that an announcement was imminent - possibly as Dame Patsy Reddy to be Governor-General early as today.
He indicated that his next choice would not be a former politician, scotching speculation that Sir Don McKinnon could be in the running.
"I know it has happened - with Sir Keith Holyoake, for instance - but as a general rule that is not my preference."
Sir Jerry Mateparae's five-year term is up on August 31.
As a former Chief of Defence Force, he was the first non-judge appointed since the MMP electoral system began in 1996.
He was preceded in order by Sir Anand Satyanand, Dame Silvia Cartwright and Sir Michael Hardie Boys.
It was seen as a great advantage to have a legal background under MMP because of the potentially greater role a Governor-General could play under a system that leaned towards coalition building and minority Government.
Asked if the position needed someone with a legal background or just someone who could take advice, Mr Key said: "In the end I think you need someone who can carry out the duties and responsibilities of the Governor-General with the mana and respect that that office deserves."
Mr Key said Sir Jerry had done an outstanding job.
The Governor-General acts on the advice of ministers of the Crown and does not initiate actions or get involved in political debate.
The Governor-General appoints a Prime Minister after an election, based on public knowledge of which political leader can command a majority in the House.
The role also involves a lot of work with charities and communities.
It involves entertaining visiting dignitaries at Government House in Wellington and Government House in Auckland - occasionally members of the royal family.
These days it also involves a lot of diplomacy in representing New Zealand at events overseas.
Dame Patsy Reddy
• Aged 61
• Married to Sir David Gascoigne, former Judicial Conduct Commissioner.
• Recent work: Co-reviewer of NZ intelligence agency legislation with Sir Michael Cullen.
• Chair of Film Commission, deputy chair of NZ Transport Agency, chief negotiator for Treaty Settlements in Bay of Plenty.
• Barrister and solicitor, professional director 20 years.Former partner in law firm Minter Ellison Rudd Watts and former law lecturer.