The 44-year-old former Swindon Town boss succeeds Martin O'Neill, who was sacked on Saturday following the club's loss to Manchester United, signing a two-and-a-half-year deal
The 44-year-old Italian signs a two-and-a-half-year deal with the Black Cats and will begin working with the relegation-threatened side on Monday.
Chairman Ellis Short said: “Paolo is hugely enthused by the challenge that lies ahead of him. He is passionate, driven and raring to get started.
“The sole focus of everyone for the next seven games will be to ensure we gain enough points to maintain our top-flight status.
“I think that the chances of that are greatly increased with Paolo joining us."
The appointment comes after Sunderland sacked Martin O'Neill on Saturday evening following the 1-0 home loss to Manchester United, ending a rein that began in December 2011.
“Our fans have shown tremendous patience and understanding this season," Short added.
"They have continued to back the team in huge numbers, both home and away, and that is something that continues to inspire all of us in our drive to give them the successful club they deserve.
“That remains our primary aim.”
Di Canio's only managerial experience was with Swindon Town, who he guided to the League Two title in 2011-12, before resigning in February this year following off-field financial disagreements.
The Black Cats are just one point clear of the relegation zone and face a trip to Chelsea next Sunday.