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Jeff Sessions, a former prosecutor, was turned down for a federal judgeship in 1986 because of alleged racist remarks.
Donald Trump has also nominated Mike Pompeo as CIA director and retired Lt-Gen Michael Flynn has been appointed national security adviser.
His latest picks were praised on Twitter by David Duke, former leader of the white supremacist KKK group.
In a statement, Donald Trump called Jeff Sessions a “world class legal mind”.
“Jeff is greatly admired by legal scholars and virtually everyone who knows him,” he added.
Jeff Sessions, 69, said in a statement that he “enthusiastically” embraced Donald Trump’s vision for “one America and his commitment to equal justice under law”.
“I look forward to fulfilling my duties with an unwavering dedication to fairness and impartiality,” he said.
Jeff Sessions and Gen. Michael Flynn, 57, have been close allies of Donald Trump since the early days of his campaign and share many of his views.
Jeff Sessions opposes any path to citizenship for undocumented immigrants and was an enthusiastic backer of Donald Trump’s pledge to build a wall on the border with Mexico.
In 1986, Jeff Sessions was nominated by then-President Ronald Reagan for a federal judgeship, but was rejected because of allegations that he had made racist remarks. He strongly denied the claims.
Gen. Michael Flynn, a vocal critic of the Obama administration since he was ousted as director of the Defense Intelligence Agency in 2014, agrees with Donald Trump on renegotiating the Iran nuclear deal, strengthening ties with Russia and intensifying the fight against Islamic extremists.
He once tweeted that fear of Muslims was “rational”.
Kansas Congressman Mike Pompeo, 52, is a supporter of the conservative Tea Party movement. He originally backed Marco Rubio as the Republican candidate but supported Donald Trump after he won the nomination.
Mike Pompeo has also been a fierce critic of Barack Obama’s nuclear deal with Iran, tweeting on November 17: “I look forward to rolling back this disastrous deal with the world’s largest state sponsor of terrorism.”
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