Grayson replaces David Moyes, who resigned in May, and joins after four years with fellow Championship (second tier) side Preston North End.
"I'm excited by the opportunity to manage this club and I want to bring the good times back," the former Leicester City, Aston Villa and Blackburn Rovers defender told the club website.
"Sunderland are so fortunate to have such tremendous support and I want to give these fans a team they can be proud of."
The north-east club finished bottom of the Premier League last season with 24 points after only six victories in 38 games, scoring 29 goals.
(Reporting by Alan Baldwin, editing by Ian Chadband)
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