Birmingham issued a statement on Wednesday saying the former Italy and Chelsea forward had been appointed, hours after the second-tier club announced that former boss Gary Rowett had been sacked.
Zola, 50, has twice managed in England, at West Ham United where he began his coaching career, and at Watford where he resigned in 2013.
"His pedigree, philosophy and ambition fits with what we would like to achieve as we move in a new direction," club director Panos Pavlakis said.
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"Gianfranco has a wealth of top-level experience as both manager and player and we are extremely excited about his appointment."
Birmingham have not played in the Premier League for the last five seasons, having been relegated in 2011, the same year they won the League Cup.
Rowett's sacking came as a surprise with the club seventh in the Championship, only outside the playoff places on goal difference following a 2-1 home win over Ipswich Town on Tuesday.
The club said the decision to dismiss Rowett had been tough to make, but the owners remain "determined to lead the club to a bright and exciting future".
(Reporting by Toby Davis; editing by Ed Osmond)
