Defender Terry, 27, who succeeded David Beckham as skipper after the 2006 World Cup, was given the nod ahead of Manchester United's Rio Ferdinand.
The Chelsea skipper, who has won 44 England caps, begins his second stint as captain in Wednesday's friendly against the Czech Republic at Wembley.
"I think everybody realises it means the world to me to retain the armband," said Terry.
"To get the armband back is a huge achievement for me.
"I heard about an hour before the news conference, just after training. The manager called the whole squad together and told us as a whole.
The big personality of John was the reason I chose him but Rio is very important to the team
England coach Fabio Capello"For me to get it above the likes of Rio Ferdinand and the other players in the squad is a great honour."
Terry admitted he was a little surprised when Capello selected him ahead of Ferdinand.
"I'd never given up on the armband and never will do," he stated.
"I'd heard the whispers that Rio had got the armband so I was a little bit shocked but I've got to make the most of it."
Terry added: "My target now is to qualify for the World Cup and that's the aim going forward."
Capello revealed Terry's "big personality" was the deciding factor.
"Rio, when he was captain, played very well - the same level as John," said the Italian.
"It was not easy for me to choose because they are very good players.
"The big personality of John was the reason I chose John but Rio is very important to the team."
Ferdinand has been named as vice-captain of the national team.
England's World Cup qualifying campaign begins in September, with ties against Andorra in Barcelona and Croatia in Zagreb.
Terry was the captain under former coach Steve McClaren as England failed to qualify for Euro 2008.
The centre-half was an inspirational figure for Chelsea during the 2007-08 campaign, although the season ended in disappointment.
Chelsea finished as runners-up in the battle for the Premier League title and Terry agonisingly missed a penalty in May's Champions League final shoot-out that would have given the Blues the trophy at the expense of eventual winners Manchester United.
Capello has taken his time to choose who will wear the armband on a permanent basis, the decision coming eight months after he was appointed as McClaren's replacement.
Liverpool's Steven Gerrard captained the side in Capello's first friendly against Switzerland, Ferdinand for the defeat in France, Terry for the 2-0 win over the United States and David Beckham for the game against Trinidad and Tobago in June.
The Italian said all along he was trying out the players in the role and would make a permanent choice in time for the World Cup qualifiers.

Bouma was treated for several minutes before being carried off
Aston Villa are optimistic defender Wilfred Bouma will return in four to six months after a successful operation on his dislocated right ankle.
The 30-year-old suffered the injury in Villa's Intertoto Cup victory over Odense BK on Saturday.
Bouma had an operation on Sunday, during which the ankle was reset and a plate inserted to stabilise the area.
"The operation went very well. Freddie is in good spirits," manager Martin O'Neill told Villa's website.
"Everybody is very optimistic he will make a rapid recovery.
"It was a bad injury but with the level of treatment he has had and the post-operative prognosis we've been given, we're all hoping to see him back, perhaps sooner than everyone expected on Saturday night."
The injury happened in the first 15 minutes of the match against Danish side Odense at Villa Park.
Bouma's team-mates looked on in shock as the left-back underwent treatment before being replaced by Gareth Barry.
The Dutchman was taken to hospital where an X-ray showed his right ankle was dislocated rather than broken - and Villa boss O'Neill initially feared the worst.
"I am a bit squeamish and the pictures were not so good," said O'Neill after Villa's 1-0 win, which gave the Midlands club a 3-2 aggregate victory and a place in the final qualifying round of the Uefa Cup.
Bouma joined Villa from PSV Eindhoven for £3.5m in August 2005 and O'Neill added: "It's terrible news because he played every single game last season. He was fantastic but he'll come through it."

Torres struck in the first half as Spain beat Germany 1-0 in Vienna to win their first major trophy for 44 years and Torres's first trophy of any kind.
The Liverpool striker said: "I feel a tremendous joy. It still hasn't sunk in what we've achieved with this victory.
"The team that played the best football at Euro 2008 won the title and we have a place in European football history."
He added: "It's just a dream come true. This is my first title and I hope it's the first of many. "Victory in a Euro, it is almost as big as a World Cup. We are used to watching finals on television, but today we were here and we won.

Torres was soaked in champagne by his team-mates
"My job is to score goals. I want to win more titles and be the most important player in Europe and the world."
Coach Luis Aragones, who now steps down after four years in the job, paid tribute to Torres after the final whistle.
"Fernando is a great player for Liverpool and for our team and he can go anywhere because he has really extraordinary speed and he knows how to dribble," said the 69-year-old.
"We always tell him he's a player who is so young that he can learn to do everything and there is no doubt he can be one of the best players in the world."
Aragones, who could barely contain his delight with his side's resounding victory, believes the way they won the tournament may inspire other teams to try and play the same brand of football in the future.
"All those that love football want to see it played that way," he said. "People want players who can pass well and get into the penalty area and score goals.
"They'll look up to Spain as a model of how to play football.
"We've won this tournament brilliantly, it's a happy day for the players, the background staff, me, all Spaniards."
Arsenal midfielder Cesc Fabregas hailed his team's triumph as a "victory for beautiful football". The 21-year-old said: "It feels amazing, this is the best day of my life in football, I don't think we've realised yet what we have achieved.
"It's been a long time since a team playing this kind of beautiful football won a tournament like this.
"It is 44 years after Spain last won anything. This is one of the best trophies you can win as a footballer and I did it, we did it.

Fabregas hailed victory as the best day of his life
"We play football on the ground, we try to pass the ball and we won this tournament in style. We gave football the success it deserves.
"You know what a young squad this is, so hopefully we can think about winning the World Cup in two years' time."
Liverpool's Xabi Alonso, who came off the bench in the second half, added: "It feels great, of course - so many years without winning anything.
"It was very important for everyone - for the supporters, for the players, for the staff - and now we are absolutely happy and we want to enjoy the moment."

Thaksin Shinawatra arrived at Manchester City in July to a fund of goodwill from success-starved fans - now he risks every shred of his sporting reputation by sacking Sven-Goran Eriksson.The mere mention of Eriksson's name is the catalyst for a variety of a emotions after his time of under-achievement and excess personal baggage with England.And yet the Swede now, rightly, finds himself the subject an outpouring of sympathy as Thaksin prepares to make his sacking official.Before outlining the scale of mistake Thaksin is about to make, it is only right to go back to June last year when I wrote a piece insisting the former Thai Prime Minister was wrong to appoint Eriksson.He was right. And I was wrong. Now he is very wrong.I questioned whether Eriksson was a modern team-builder and whether he had the hunger and desire to do the job at Eastlands. It was a view coloured by watching his listless performances at three major tournaments in charge of England.Eriksson has answered those charges emphatically in a first season that has been one of undoubted progression, despite a fade-out in the second half of the campaign.He has also achieved the specific goal set for him by Thaksin - namely a top ten Premier League finish.Eriksson had to work the transfer market quickly and effectively when he took over because he was barely left with enough players after the departure of Stuart Pearce and the clock was ticking on the new season.Martin Petrov and Elano brought class and creativity, while Croatia's Vedran Corluka was another success.He made mistakes, namely the £8m paid for striker Rolando Bianchi, but when a workable squad has to be assembled swiftly from the wreckage of what had greeted him, the odd gamble will fail.If Eriksson made a fatal error, it may have been by blending his new players so quickly and starting the season so spectacularly.This appeared to raise the expectations of Thaksin, a man who appears to have a slender grasp on the realities of football if he feels Eriksson's performance this season warrants the sack.As I have stated, there is a helping of humble pie with these words because I believed Eriksson would be a failure at Eastlands after the England experiences.But he had started to rebuild his own and Manchester City's reputation this season - and this should have only been the start.City have worked hard in recent years to cast aside a name for snatching defeat from the jaws of victory.This has been done behind the scenes and Eriksson was in the process of putting matters right on the pitch. Thaksin is now about to throw so much good work away.Eriksson has also shown a willingness to give City's exciting crop of young players their chance and it was clear they had faith in him.Word from City is that Eriksson is a hugely popular figure, revered and respected by everyone at the club - except, it seems, by the man who matters.If Thaksin thinks his sacking of Eriksson is the decisive hands-on action the club's supporters revel in, he is guilty of a desperately bad misjudgement.City's fans, almost unanimously, are outraged by the news and the cynics might even suggest it is rather handy for Thaksin that the axe is falling after City's final home game.This spares him inevitable protests at Eastlands, although City fans will make their voices heard in support of Eriksson at Anfield and The Riverside in the final two games of his reign.Thaksin is apparently lining up Portugal coach Luiz Felipe Scolari - and while the Brazilian is a World Cup winner with his own country, what is his knowledge of the Premier League?Eriksson's departure has reportedly devastated City's squad. What now for them? What of all the players Eriksson brought in?Make no mistake, the law of football dictes that predators will now be circling the likes of Richard Dunne, Micah Richards, Martin Petrov and Elano, ready to make capital of the uncertainty and unrest.Will the new man want Eriksson's signings? Will Thaksin effectively have to start spending again?What will the new man have to spend? When will he be able to spend it? And will he be allowed to spend it on the men he wants?And - crucially - will Thaksin start the sacking game again next term if City fail to achieve what appear to be his farcially unrealistic expectations?Eriksson achieved Thaksin's goal of a top ten finish with something to spare and will still be sacked. Would any manager of consequence be in a rush to join City with that backdrop?Manchester City is a club crying out for stability on the pitch after the wilderness years and Eriksson could have provided it.Sadly, Thaksin has chosen to demonstrate his impatience and sporting naivety in one fell swoop in a move that has alienated fans only too willing to give him a chance.Manchester City's fans do not deserve that. Manchester City as a club does not deserve that. Eriksson does not deserve that either.It remains to be seen whether this is the defining moment of Thaksin's reign - but he is in the process of committing a major error.