The 27-year-old steps in for regular skipper Sam Warburton, who is only named on the bench after struggling for playing time due to injury.
O'Mahony was also named captain for the 32-10 win over Maori All Blacks last weekend, as the Lions racked up successive victories for some much-needed momentum heading into the crunch clash with world champions New Zealand.
Commenting on his team selection, Gatland said: "We have picked a side based on form with a lot of players putting their hands up, especially from the Crusaders and Maori All Blacks games, and it was a lively selection meeting.
"The win against the Chiefs was also extremely important for the squad and some players played themselves into the side.
"We have continuously been strong at set piece and have been good defensively in the last two or three outings. But to beat the All Blacks you have to be courageous and play some rugby – you have to score tries and I think we have picked a team capable of doing that."
The Lions will take on the All Blacks three times during their 2017 tour.
British and Irish Lions team to face New Zealand:
Backs: Liam Williams (Wales); Anthony Watson (England), Jonathan Davies (Wales), Ben Te'o (England), Elliot Daly (England); Owen Farrell (England), Conor Murray (Ireland)
Forwards: Maka Vunipola (England), Jamie George (England), Tadhg Furlong (Ireland); Alun Wyn Jones (Wales), George Kruis (England); Peter O'Mahony (capt, Ireland), Sean O'Brien (Ireland), Taulupe Faletau (Wales)
Replacements: Ken Owens (Wales), Jack McGrath (Ireland), Kyle Sinckler (England), Maro Itoje (England), Sam Warburton (Wales), Rhys Webb (Wales), Jonathan Sexton (Ireland), Leigh Halfpenny (Wales)