The Italian has replaced Gary Rowett after he was dismissed earlier on Wednesday.
Zola was immediately installed as favourite for the job and the club have acted swiftly, ahead of Saturday’s visit of Brighton.
Zola has agreed a two-and-a-half-year deal at St Andrew’s with former Chelsea team-mate Pierluigi Casiraghi joining him at the club as first-team coach.
Gabriele Cioffi has also been named as a first-team coach with another ex-Chelsea team-mate Kevin Hitchcock goalkeeper coach.
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.”
Zola was appointed less than six hours after Rowett and his coaching staff parted company with the club after two years.
Rowett was dismissed with Birmingham only outside the play-off places on goal difference after winning 2-1 at home to Ipswich on Tuesday.
The Blues’ previous two results were heavy 4-0 and 3-0 defeats to Newcastle and Barnsley respectively but they are the only two losses in the club’s last seven league matches.
Birmingham’s new owner Trillion Trophy Asia Limited announced the decision to relieve Rowett of his duties had been taken ”with a strategic, long-term view and with the club’s best interests at heart”.
A statement read: ”This has not been an easy decision to make.
”The board would like to thank Gary and his backroom staff for their efforts and wish them all the best for the future.”
Former Birmingham defender Rowett left Burton – who he had taken to successive League Two play-off campaigns – to replace Lee Clark as Blues boss in October 2014.
He took over after they had lost 8-0 to Bournemouth and steered the club away from 23rd to a 10th-place finish in 2014-15 and last season he again guided the club to 10th.
Rowett won 42 of his 106 games, drawing 32 and losing 32.