The former Portugal midfielder left his post with Swansea by mutual consent on Monday in order to open talks with Leicester, who have been looking for a new boss following Nigel Pearson's departure to Hull City. Leicester chairman Milan Mandaric said: "I am delighted to acquire a manager of such great calibre.
"Paulo has an excellent reputation as both a player and now as a manager, and I believe he is the right man to take our club forward.
"I admire his style of football and I am sure all our supporters will join me in looking ahead to the new season."
The 30 year old, who also counts QPR among his former clubs, said: "I am delighted to be here, it is a great club with great supporters and a rich history and I am very excited by the challenge. The club has a fantastic stadium with great facilities and I am very much looking forward to working with the players."