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Mr Mandelson, who held two cabinet posts under Tony Blair, was reported to have fallen out with Mr Brown in 1994.
He is no longer an MP but will be given a seat in the Lords, possibly with the business and enterprise portfolio.
Business Secretary John Hutton will replace Des Browne at Defence and Geoff Hoon will replace Ruth Kelly as Transport Secretary.
Former foreign secretary Margaret Beckett is also tipped to return to the cabinet, possibly in a "cabinet enforcer" role while former cabinet minister Nick Brown is also expected to return as chief whip, to replace Mr Hoon.
The reshuffle is taking place after the announcement that Ms Kelly is to stand down to spend more time with her family. Trade minister Lord Jones has also said he wants to step down.
Mandelson row
But sources have told the BBC it is not merely a "tidying up exercise" but an attempt to reconfigure government to tackle the economic crisis.
There have been tensions between Mr Brown and Mr Mandelson for years, since the two men fell out when Mr Mandelson backed Tony Blair for the Labour leadership in 1994.
But at the height of a row between Mr Mandelson and French President Nicholas Sarkozy over international trade talks this summer, the prime minister backed the trade commissioner, saying he was doing "excellent work".
The BBC's James Landale said the appointment is part of the prime minister's attempts to reconfigure the government to deal with the economic crisis as Mr Mandelson has global experience in trade and finance.
The BBC has learned that Sir John Bond, the chairman of Vodafone, may become a "business ambassador" for the government.
Changes are not expected in the top cabinet jobs, chancellor, foreign secretary and home secretary but more are likely among lower level ministers.
Most cabinet members have been briefed on the changes, which are expected to affect lower level ministers the most. Mr Brown has now left Downing Street on a visit to Luton.
Among those who have been tipped for promotion are immigration minister Liam Byrne, housing minister Caroline Flint, Home Office minister Tony McNulty and backbencher Jon Cruddas, who did well in last year's deputy leadership race.
The creation of a new National Economic Committee is also expected to be confirmed, to bring together ministers across government to deal with the economic crisis.
The news that Ms Kelly was to step down as transport secretary to spend more time with her four children came as a surprise during Labour's conference week, just hours after Mr Brown had given his keynote speech.
There had been suggestions she was unhappy with Mr Brown's leadership but she has described him as a "towering figure" and said it was a personal decision.
Lord Jones - the former CBI chief brought into Gordon Brown's first cabinet as one of the so-called "goats" - a member of the "government of all talents" - has said he only ever intended to do the job for a limited time and was not a judgement on Mr Brown.
He had been involved in some controversy during his time in the job, for example expressing concerns about plans to tax "non-domiciled" foreigners in Britain.
(BBC)
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