55-year-old Hammond, who was appointed transport minister in the Conservative-led coalition in May 2010, has been pushed into the key cabinet post.
Werritty, who posed as an adviser to Fox and accompanied the latter to official meetings and foreign tours, was at the centre of the controversy that dogged Fox at every public engagement in the last week.
In his resignation letter, Fox said he had "mistakenly allowed the distinction between my personal interest and my government activities to become blurred."
New revelations today indicated that financial backers linked to Israel and a private intelligence company helped fund the travels of Werritty.
According to The Times, financial backers from Israel and a private intelligence company helped put in 147,000 pounds in a company set up by Werritty.
Responding to Fox's resignation, Prime Minister David Cameron said: "I understand your reasons for deciding to resign as defence secretary, although I am very sorry to see you go."
"We have worked closely for these last six years, and you have been a key member of my team throughout that time," he was quoted as saying by BBC.
The Oxford-educated Transport Secretary becomes Britain's seventh defence secretary in ten years.
Hammond, who became an MP in 1997, has worked in a variety of business environments, including manufacturing, property and construction and oil and gas.
