Houllier will succeed Martin O'Neill and has returned to the Premier League after a six-year absence since ending his reign at Liverpool.
He had been working as technical director for the French Football Federation.
The 63-year-old is relishing the challenge of helping Villa to build on the success achieved under O'Neill, who resigned five days before the start of the campaign.
Villa issued a statement this evening confirming Houllier's appointment.
But there was no indication of who will be Houllier's number two after Phil Thompson declined the opportunity to reunite the partnership which had been successful at Anfield.
Houllier, in a media statement, said: "I am very happy and proud to join this great and historic club.
"It was a very difficult decision for me to leave the FFF [French Football Federation].
"But I could not turn down the opportunity to manage a club whose approach, both on and off the pitch, I have long admired.
"Aston Villa is one of England's biggest clubs and has an amazing set of fans.
"This is a tremendous challenge and one I am very much looking forward to taking on."
Villa chief executive Paul Faulkner said: "Two of the key qualities we identified as being of crucial importance were experience of managing in the Premier League and a strategy for building on the existing strengths in our current squad.
"Gerard Houllier comfortably satisfies these criteria.
"In fact, he stands out as a football man who understands the ethos of our club and shares our core values.
"We look forward to working with Gerard and supporting him.
"We ask our supporters to get behind the new manager and the team as we look to build on the progress we have made over the past four years in all areas of the club."