Current coach Marcello Lippi had never publicly said he was leaving after this summer's tournament and conflicting signals from the World Cup winner and Italian football federation president Giancarlo Abete prompted an array of rumours.
Abete wanted a solution before the team flew off to South Africa and has finally now found his man.
"Prandelli will be coach for four years," a federation spokesman said. "Prandelli will be officially presented as Italy's coach after the World Cup," the spokesman added, saying that financial details and the composition of Prandelli's backroom staff had yet to be determined.
"The federation has found the right person. I had said to Abete at Christmas that I would do my two years and then stop," he told reporters.
Abete had said any replacement for Lippi would be Italian but his options were limited given Chelsea's Carlo Ancelotti, Manchester City's Roberto Mancini and Roma's Claudio Ranieri, who had all previously expressed interest in the job, have only just completed their first seasons with their clubs.
The fans blamed the team's slump on their good European run, a drugs ban for striker Adrian Mutu and tensions between Prandelli and the club's board.
Italy are preparing for the World Cup and South Africa's altitude at a training camp in the Italian Alpine ski resort of Sestriere.
Prandelli's major task in the Euro 2012 qualifiers starting in September will be to find the right balance between the new generation of emerging talent and the experienced heads who performed so well in Germany four years ago.
