"The trainer will be presented officially on Thursday afternoon," the team based in the southern city of Porto Alegre said on their website.
The 59-year-old former Real Madrid and Brazil coach, sacked by Flamengo in Rio de Janeiro earlier this month, replaces Caio Junior who was dismissed on Monday.
He led Flamengo, Brazil's most popular club, through a tricky Libertadores Cup preliminary round tie but problems with senior players, including party-loving captain Ronaldinho, brought about the end of his tenure after 15 months.
Luxemburgo steered four different clubs to the Brazilian championship title including Palmeiras twice, and held the Brazil job from 1998 to 2000. He spent the 2004/05 season at Real Madrid.
Gremio, who have won the Brazilian league title and the South American Libertadores Cup twice each, finished 12th in the national championship last year, 23 points behind winners Corinthians. The 2012 championship starts in May.
Get the best features, fun and footballing frolics straight to your inbox every week.
Thank you for signing up to Four Four Two. You will receive a verification email shortly.
There was a problem. Please refresh the page and try again.