He succeeds Ian Holloway, who left the club by mutual consent after the club's relegation at the end of last season.
Pearson, 44, becomes the Foxes' sixth manager since chairman Milan Mandaric took over at the Walkers Stadium 16 months ago.
The club had been keen to speak to MK Dons boss Paul Ince but the former England midfielder is now being heavily linked with Blackburn.
Pearson said: "I am delighted I have been given this magnificent opportunity to revitalise the fortunes of this great club after what has been a difficult few years.
"I have an enormous amount of respect for chairman Milan Mandaric and chief executive Lee Hoos, who I worked very closely with at Southampton, and I can promise everyone connected with this club I will be giving the job my 100% commitment.
"I am privileged to have been given the chance to turn around the fortunes of a club with so much history and such a strong fan base and I am confident my style of management can help bring the good times back to Leicester City."