Ms Smith, the daughter of the late Labour leader John Smith, is leaving her position at Channel 4 News to front the half-hour flagship evening news programme, Scotland 2014, from May.
Scotland 2014, which will be broadcast from 10.30pm from Monday to Thursday on BBC2 Scotland, will replace Newsnight Scotland and go head to head with STV's evening show, Scotland Tonight.
The show is initially planned to run until October, but a senior BBC source said last night it was unlikely Newsnight Scotland would ever return.
It has been running since 1999 and is frequently fronted by Gordon Brewer, whose role in the news operation at BBC Scotland is now unclear.
Newsnight will be shown in Scotland at 11pm, half an hour after it is broadcast in the rest of the UK.
Ms Smith, currently the business correspondent and a presenter for Channel 4 News, trained at BBC Scotland and has previously covered events such as the election of President Barack Obama, the Haiti earthquake, the first Holyrood elections and the Lockerbie trial.
She said: "It is impossible to resist the opportunity to return to Scotland at this crucial time. I'm very excited about Scotland 2014 and looking forward to coming back to BBC Scotland, where I began my broadcasting career."
Scotland 2014's new programme editor is Marcus Ryder, who will move from his current role as Investigations Editor.
Mr Ryder said: "Our aspiration is very much to provide the definitive account of stories that well-informed Scots need to know about - and I'm delighted that we've got Sarah anchoring the programme."
Asked whether the BBC had any concerns over Ms Smith's impartiality in the referendum coverage, given her family background - Labour is campaigning against Scottish independence - a spokesman for the corporation said: "Sarah is a hugely respected news broadcaster and we're delighted to have her back with us."
BBC Scotland said the new show "will demonstrate how Scotland impacts on national and global events and how national and global events impact on Scotland."
A BBC source said Newsnight Scotland had been seen by some as an uneasy compromise ever since its launch.
Jeremy Paxman himself criticised Newsnight Scotland and the links between the two parts of the show were often uneasy.
A source said: "We need to freshen up our approach and do something different for the referendum. If we are going to satisfy our audience we need to do something different."
Joining Ms Smith will be a new political correspondent, Lucy Adams, formerly chief reporter of The Herald, Laura Bicker, a BBC network news correspondent based in Scotland who will become a referendum correspondent, and Colleta Smith from BBC Northern Ireland's Business Unit, who has been appointed economics correspondent of the unit.
An SNP spokesman said: "These are significant announcements by BBC Scotland, and we look forward to receiving further information about what this means for their news and current affairs output both during and, just as importantly, after the referendum."