The former Nottingham Forest boss replaces Derek McInnes at Ashton Gate, who parted company with the club on Saturday after a disappointing 4-0 defeat to Leicester City
The Irishman spent spent five months in charge at Nottingham Forest earlier this season, before he was surprisingly sacked on Boxing Day, despite taking 36 points from 24 games and leaving the club just outside the play-off spots.
O'Driscoll had also been linked with moves to Barnsley or Blackpool, but turned them down for Ashton Gate.
Jon Lansdown, the Robins' managing director, told reporters: "I am delighted he decided to join us ahead of a number of other offers he has received.
"In Sean we have someone with a track record of developing clubs longer term, as well as a wealth of experience at this level, which will be vital in our fight for survival in the Championship.
"It's important that we give ourselves the best possible chance of surviving and moving up the Championship table this season.
"This season has been a rocky ride and we find ourselves in a difficult position, but we still have the time and ability to get out of it.
"We need everyone associated with Bristol City Football Club to pull together and get behind Sean, the staff and players to give them every ounce of support possible between now and the final game of the season."
The announcement was made at a press conference this morning and O’Driscoll added: "It's a good fit. I like the way the club has been developed, it has always been well-respected and I think I can be successful.
"Sometimes you have to go with your gut instinct. I'll get all the credit or all the blame, but in this league anything's possible."