Megson has been appointed successor to Martin Allen, who was sacked by Foxes chairman Milan Mandaric just four games into the new season.
The 48-year-old, who twice guided former club West Brom into the top-flight during his time at the helm, has been out of football since being sacked by Nottingham Forest 18 months ago.
"I am delighted to be back in management and doubly delighted that it is with a football club of the stature of Leicester City," he declared.
"Leicester is a Premier League club in everything but its divisional status. The stadium and training ground are both of the highest standard, whilst the support is both Premiership standard in its quality and quantity.
"In coming to Leicester, I am not just working at a Championship club that is happy to plod along.
"This club has got ambition to get back into the Premiership and that is something that appeals to me greatly." Megson will be assisted by Frank Burrows and Gerry Taggart at the Walkers Stadium.
The existing backroom staff of academy manager Jon Rudkin, coach Steve Beaglehole, goalkeeping coach Mike Stowell and head physio Dave Rennie will all remain at the Championship club.