Allan, 35, is expected to be given a title akin to strategy and comms director. An official announcement is expected within days.
Downing Street refused to comment, but said existing comms director David Hill would remain in his post. It is understood Hill will continue to oversee the day-to-day running of the press office under Allan.
Allan previously worked in Downing Street under former comms chief Alastair Campbell. He left in 1998 to head comms for BSkyB before setting up Portland PR. Allan is looking to sell Portland before taking up the post, with Michael Howard's aide Rachel Whetstone the frontrunner to acquire the agency.
His links with BSkyB - a Portland client - could prove useful in keeping the Murdoch press close to Blair.
Weber Shandwick UK & Ireland CEO Colin Byrne, who formerly ran the Labour press office, said: 'Tim is a strategic thinker in a similar mould to Peter Mandelson,' adding the appointment signalled a shoring up of Blair's 'support network'.
Eurostar communications director Paul Charles, who has retained Portland for lobbying work, predicted Allan's style would be one of 'persuasion and negotiation', and a far cry from the aggressive tactics associated with the New Labour PR machine.
One colleague of Allan's for many years said: 'Tim's return to Downing Street would signify Blair has not run out of steam and ideas'.