Napolitano, popular among her constituents as well as with the netroots, was to be term-limited in 2010, but was reportedly considering a run for Arizona's Class 3 senate seat, currently occupied by John McCain. At least one poll had shown Napolitano ahead of McCain in a trial-heat matchup, although McCain remains fairly popular in Arizona and had led Napolitano in other polling of the state.
A promotion to Homeland Security would not inherently dash Napolitano's prospects of running for the Senate. Florida's Mel Martinez, George W. Bush's Secretary of Housing and Urban Development, stepped down from his position in 2003 to run for Florida's open senate seat, and last year, Secretary of Agriculture Mike Johanns did the same to run for Nebraska's; both Republicans won. Martinez and Johanns, however, had served in their positions for the better part of three years, whereas Napolitano would presumably have to vacate her position by early 2010 to run a competitive race against McCain. Martinez and Johanns, moreover, were running for open seats that they were favored to pick up, whereas Napolitano would have to run against one of the icons of the Senate, albeit one who recently suffered a notable electoral defeat.
If Napolitano does not run, it is not clear who the Democratic nominee might be. Democrats will control 5 of 8 chairs in Arizona's delegation in the 111th Congress, although some of those Democrats are likely to be too green, too liberal, or too vulnerable in their own seats to have a plausible chance at statewide office. The notable exception is AZ-8's Gabrielle Giffords, who has proven to be a good fundraiser and a savvy politician, winning her only two elections by double-digits in an R+1 district. Giffords, however, could also choose to run for governor, as she is talented enough that she may harbor longer-term ambitions for national office.
There is also a chance -- maybe even a fairly good chance -- that John McCain chooses not to run, although my gut-level read of the situation is that McCain would not want to end his career on a losing streak and therefore becomes less likely to retire if he does not have to worry about Napolitano. AZ-6's Jeff Flake is considered the favorite to run for the position if McCain retires; he has a strong brand and would be a formidable opponent. If a Flake v Giffords grudge match ever materializes, it should be a fun one to watch.
Democrats will also lose the governorship if Napolitano accepts a cabinet position. Arizona is one of four states without a lieutenant governor's position, so the honors would go to Jan Brewer, the Republican Secretary of State.