The 46-year-old has succeeded his fellow Spaniard Pep Clotet, who left the Championship club with four games of the season remaining.
Prior to his time at the City Ground, he led Middlesbrough to promotion to the Premier League in 2015-16.
"I'm delighted to be joining a club with the history and fanbase that Birmingham City has," Karanka told the club website.
"I share the excitement and determination of everyone here to start working together on all the challenges that lie ahead."
Need a VPN? Or seeking to switch? Then support Tribal Football by clicking here to sign up with our official partners NordVPN. Not only will you receive the best VPN experience, but also great discounts by signing up via Tribal Football. Thanks for your support!