The former Spurs midfielder has been in caretaker charge at White Hart Lance since Andre Villas-Boas' tenure came to an end following a 5-0 home defeat to Liverpool earlier this month.
Sherwood has overseen a League Cup loss to West Ham and Sunday's 3-2 victory away to Southampton in the Premier League.
A host of other names had been linked with the vacancy but chairman Daniel Levy confirmed on Monday that the club had opted to stick with Sherwood.
"We were extremely reluctant to make a change mid-season, but felt we had to do so in the club's best interests," Levy said in a statement on the club's official website.
"We have a great squad and we owe them a head coach who will bring out the best in them and allow them to flourish and enjoy a strong, exciting finish to the season.
"We are in the fortunate position of having within our club a talented coach in Tim Sherwood.
"We believe Tim has both the knowledge and the drive to take the squad forward."
Sherwood's first-team coaching staff also includes Chris Ramsey, Les Ferdinand and Steffen Freund.
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