The Italian has replaced Gary Rowett, who was sacked by the Midlands club earlier in the day.
Birmingham are currently placed eighth in the Championship and are only one point behind the playoff places.
Club Director Panos Pavlakis said: “We are delighted to welcome Gianfranco and his backroom team to the Club.
“His pedigree, philosophy and ambition fits with what we would like to achieve as we move in a new direction.
“Gianfranco has a wealth of top-level experience as both manager and player and we are extremely excited about his appointment.”