The former Liverpool manager is back in the Premier League after six years at Anfield.
He told Villa's official website, "I am very happy and proud to join this great and historic club.
"It was a very difficult decision for me to leave the FFF but I could not turn down the opportunity to manage a club whose approach, both on and off the pitch, I have long admired.
"Aston Villa is one of England's biggest clubs and has an amazing set of fans. This is a tremendous challenge and one I am very much looking forward to taking on."
Villa chief executive Paul Faulkner added, "Two of the key qualities which we identified as being of crucial importance in our search for the new manager were experience of managing in the Premier League and a strategy for building on the existing strengths in our current squad, and Gerard Houllier comfortably satisfies these criteria.
"In fact, he stands out as a football man who understands the ethos of our club and shares our core values.
"We look forward to working with Gerard and supporting him and we ask our supporters to get behind the new manager and the team as we look to build on the progress we have made over the past four years in all areas of the club."Houllier's last coaching stint in club football was with French giants Olympique Lyonnais in 2007, where he won Ligue 1 twice.
He resigned from his post as the national technical director of football for France in order to join Aston Villa as their new manager, according to the latest reports.
France Football claims that the former Liverpool boss told French football president Fernand Duchaussoy that he is quitting his role in the French national set-up. It is reported that the 63-year-old made a call to Duchaussoy on early Wednesday evening and informed him of his decision.
Duchaussoy told French radio station RTL, "I would actually let him go to Aston Villa. This is a very personal decision. He's a long-time friend whom I admire greatly. It is a very personal decision of Gerard Houllier."
Duchaussoy also said that Houllier had told him "he wanted a new adventure" and added "it is his main motivation and is a unique opportunity to relive the sensations of the past."