The source, who was not authorized to speak on the record, said Obama will formally announce the nomination tomorrow.
Sebelius, 60, was an early Obama supporter. She picked his presidential campaign over that of Hillary Rodham Clinton, now the secretary of state. Sebelius worked tirelessly for Obama's bid and was a top surrogate to women's groups.
Obama's first choice for the department, former Senate Majority Leader Tom Daschle, withdrew after disclosing he had failed to pay $140,000 in taxes and interest.
Sebelius drew praise for the consumer watchdog role she played as Kansas insurance commissioner for eight years before she became governor.
Her name had been floated for several cabinet posts. She said in December that she had removed herself from consideration from a cabinet job, citing Kansas' budget problems that needed her attention.
Sebelius is in the middle of her second term as governor and is legally barred from seeking a third term next year. Many Democrats had hoped she would finish her term and run for the U.S. Senate seat that Republican Sam Brownback is giving up in 2010.
Kansas has not elected a Democrat to the Senate since 1932, and Sebelius was seen as the best chance for breaking that string. She comes from a strong political family. Her father, John Gilligan, was the governor of Ohio in the early 1970s.
Abortion foes strongly oppose Sebelius because she once had a reception attended by a late-term abortion provider who now faces criminal charges. Democrats say there was never any doubt that Obama would appoint an HHS secretary who supports abortion rights.
Sebelius will be subject to confirmation by the Democratic-controlled Senate.