The 45-year-old, who had been out of work since being sacked by Notts County in 2010, has previously enjoyed successful spells in charge at Macclesfield Town and MK Dons.
The former England international will join his son, Tom, at the Championship club and has expressed excitement having taken his first training session on Monday.
"It's great to be here," he told the club's official website. "Considering I've watched the team play for the last 14 months, it's strange sitting here as the manager, having obviously watched Blackpool as a fan as well as watching my son play.
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"I'm over the moon though and delighted. It's great to be back on the training ground and great to be involved with, and in charge of, a great bunch of lads.
"I've worked with a lot of players and the spirit and togetherness of the lads is absolutely fantastic. I'm glad I've been given the opportunity by Karl Oyston [the chairman]."