The turnaround specialist—which bought GKN earlier this year for £8bn –said Butterworth would start as chief executive of the division, which includes GKN Driveline and the GKN ePowertrain businesses, in November.
He became chief executive of the engine propulsion technology after it was spun off from Dephi Automotive, now known as Aptiv Plc, in December 2017.
Melrose chief executive Simon Peckham said: "We are pleased to have secured Liam to lead our automotive division. His substantial leadership experience in the sector will be of great benefit to both GKN Driveline and GKN ePowertrain in achieving the significant improvements we believe are available and we look forward to working with him to deliver these."
Dephi Automotive announced on Friday that Butterworth was stepping down to pursue other interests as it cut its full year revenue guidance, blaming challenging industry conditions. It named automobile industry veteran Hari Nair as interim CEO to replace Butterworth.
In September Melrose said it was making progress with its restructuring of GKN by reducing central functions and agreeing strategic plans to improve the engineer's businesses, which include aerospace, automotive and power metallurgy divisions.