The 42-year-old, who was assistant manager with QPR and the Republic of Ireland, will replace Lee Bowyer at St. Andrew's.
Eustace told the club's official website: "I am very proud to be here. Obviously I am a Birmingham lad and I know the potential of the club and how important it is to the fans.
"We have under-achieved in the past few seasons and a club of this size, with the support that this club has, we need to be aiming higher.
"I can't wait to get going, meet the staff and get my ideas across to the players out on the pitches as soon as we can.
"The big picture is to get us as competitive as we can, to build a team that the fans are proud of, to play exciting football and win as many games as we can.
"The first thing we have to do is get this squad competitive and ready for that first game of the season against Luton."