"I'm absolutely thrilled," said the former Finland international. "It's a dream come true.
"I want to thank Hibernian Football Club for giving me this opportunity, and I know it's a big challenge.
"I'd like to thank TPS in Finland. It was a good year for me in Finnish football after being away for so long."
Paatelainen impressively led TPS to a third-placed finish in the Finnish top flight and is determined to be a similar success in Scotland.
He will take charge of Hibernian for the first time on Saturday, when they face Inverness at home in the Scottish Cup.
He said: "It's brilliant to be here and I can't wait for Saturday and the first game, and to meet the supporters."