Fonseca, 40, moves to one of Portugal's top clubs after leading unfashionable Pacos to third in the championship last season, their best ever finish which earned them a Champions League qualifying playoff spot.
"We have reached an agreement with Fonseca, who will become the main team coach," the club said in an official statement.
"I'm highly motivated to keep Porto's winning streak going," Fonseca told Portuguese television shortly after signing his new contract.
Pereira's achievements were not always enough to win over Porto's demanding fans and he was often criticised for the team's failings in the Champions League and domestic cup competitions.
"It is not a risky bet. He is still young but already had more success in his career than previous coaches who came into the job and were successful," said Porto president Jorge Nuno Pinto da Costa.
"I don't know of anyone who picked up a team like Pacos de Ferreira, started the season with the goal of not being relegated, and then took it to Europe, finishing ahead of clubs like Braga and Sporting Lisbon."
"I like balance in my teams and have them dominate possession. That must be a reality at Porto," Fonseca said.
Seen as a demanding and rigorous coach, he is a self-professed admirer of Arsenal's French manager Arsene Wenger and Benfica's Jorge Jesus.
