Collingwood, who retired from Test cricket at the end of England's 2010/11 Ashes victory in Australia, has not played for his country since last year's World Cup. But the 36-year-old remains a central figure for his native county, four-day champions in 2008 and 2009 but currently bottom of the Division One table at the halfway point of the season.
Collingwood will take charge for the first time, in place of ex-England limited-overs wicketkeeper Mustard, away to Worcestershire next week. He said: "I'm excited to have the opportunity to use my experience to help us progress in the LV= County Championship and get us back to winning ways."
Durham head coach Geoff Cook added: "We're delighted that Paul has agreed to take on the captaincy and lead the side in the four-day competition.
"Paul's international experience is an excellent asset to the team, at a time when we need to be delivering our best results.
"We are grateful for Phil Mustard's efforts as captain, and he remains an integral part of the team as a key contributor behind the stumps and with the bat."