Ms Paethongthan, who received 319 votes in favor and 145 against on Friday, is the fourth member of the Shinawatra family to become prime minister in the past two decades.
The other three, including her father Thaksin and aunt Yingluck, were ousted by military coups or Constitutional Court rulings.
The same court ruled on Wednesday that Mr Tabisin had been sacked for appointing a former lawyer who had once been jailed to his cabinet.
After being nominated as prime minister, Ms. Phea Thong Than told reporters at Prime Minister Pheu Thai's headquarters on Thursday that she admired Sretha's achievements and thought his dismissal was regrettable.
She was educated at prestigious schools in Thailand and universities in the UK, and worked for several years at the Rende Hotel Group, owned by the Shinawatra family, where her husband serves as Vice President.
She joined the Pheu Thai Party in 2021 and was appointed party leader in October 2023.
The appointment of Ms Paetongtarn brings fresh energy to Thailand's top leadership. Pheu Thai members may also be hoping she can help revive the party's political fortunes.
Mr Thaksin first became prime minister in 2001, but his second term ended abruptly when his government was overthrown in a military coup in 2006. He returned to Thailand after 15 years in exile in October last year, hours before Mr Sretha was elected prime minister.
He was allowed to return home as part of a major deal with former conservative foes who have now formed a coalition with Pheu Thai.
In June, he was charged with insulting the monarchy, becoming the most prominent person to be prosecuted under Thailand's notorious Les Majest law, which has been used against political dissidents.
Wednesday's ruling to sack Mr Sretha was widely interpreted as a warning to Mr Thaksin, who still controls Pheu Thai, to curb his ambitions.
Yingluck won a landslide victory in the 2011 election, but she too was later disqualified by the courts and her government was overthrown in a second coup. She now lives in exile.
