The 63-year-old Frenchman succeeded Martin O'Neill who quit last month just days before the start of the new season.
"I am very happy and proud to join this great and historic club," Houllier told Villa's website.
"It was a very difficult decision for me to leave the FFF (French Football Federation) but I could not turn down the opportunity to manage a club whose approach, both on and off the pitch I have long admired.
"Aston Villa is one of England's biggest clubs and has an amazing set of fans. This is a tremendous challenge and one I am very much looking forward to taking on."
Villa chief executive Paul Faulkner said in a statement that Houllier was the outstanding candidate to replace O'Neill.
"Two of the key qualities we identified as being of crucial importance in our search for the new manager were experience of managing in the Premier League and a strategy for building on the existing strengths in our current squad and Gerard Houllier comfortably satisfies these criteria," he said.
Houllier has managed Lens, Paris St Germain, Liverpool and Olympique Lyon and has twice worked as technical director of the FFF, leaving that job to move to Villa Park.
He won five trophies with Liverpool in 2001, including the League Cup, the FA Cup and the UEFA Cup, and three French league titles, with PSG in 1986 and Lyon in 2006 and 2007.
Houllier underwent heart surgery in 2001 after being taken ill at a match, but returned as Liverpool manager after five months recuperation and stayed at Anfield until 2004.
Villa have made an erratic start to the season, winning two of their three opening league matches and being eliminated from the Europa League by Rapid Vienna.
Houllier's first game in charge will be against Stoke City on Monday.
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