The former Bohemians, Carlisle United and Athlone Town manager has been instated at the helm of the Brandywell club
Collins, who steered Athlone Town to the Airtricity First Division title in 2013, will be assisted by former Candystripes captain Peter Hutton at the Brandywell.
The 52-year-old has agreed a one-year deal with the club and will finalise the remainder of his backroom staff in the coming days.
Derry City had been without a manager since the departure of Declan Devine in October.
Elsewhere, Sligo Rovers have announced the signing of former Shamrock Rovers left-back Danny Ledwith.
The 22-year-old had been released by the Tallaght-based outfit and Bit O' Red boss Ian Baraclough believes that the defender will "fit in well" at the club.
"He has the talent and we think he has the right character," Baraclough told the club's official website. "He is UCD-coached and that is similar to the way we play. Danny will fit in well."
Ross Gaynor has also agreed to extend his stay at the Showgrounds for another season. The Louth native joined the club from Dundalk in December 2011.