"It is now official," a Wolfsburg club representative told Reuters on Tuesday. The Bundesliga team said he was given a two-year deal until 2012 but no financial details were released.
McClaren joins after steering Twente to their maiden Dutch title. He took over in 2008, seven months after his spell in charge of England ended in humiliation.
"I had two fantastic years at Twente with a fabulous end but I promised my wife and kids I would stay there for two years. Now we all will move to Germany," McClaren told Tuesday's edition of Dutch newspaper TC Tubantia.
He was ridiculed by the media for standing on the touchline under an umbrella in the defeat by Croatia on a rainy night at Wembley which meant England failed to qualify for Euro 2008 and led to him being dubbed 'the Wally with the Brolly'.
McClaren was sacked by the English Football Association in November 2007.
The 49-year-old replaces interim coach Lorenz-Guenther Koestner, who took over at Wolfsburg from Armin Veh midway through the season.
In McClaren's first year with Twente the club finished second in the league and lost the Dutch Cup final to Heerenveen but this season they clinched the title by finishing a point ahead of Ajax Amsterdam.
Wolfsburg are desperate for success after winning their maiden Bundesliga title in 2009 and competing in this season's Champions League.
They finished eighth in the league this season, missing out on European football. Coach Veh was sacked after a poor first half of the campaign.
