The 52-year-old was relieved of his duties by Wigan in March after just four months in charge of the Championship outfit.
Melbourne, who are run by Manchester City's Abu Dhabi-based owners, won the Australian Cup last season, but sacked head coach Michael Valkanis due to an underwhelming A-League playoff campaign.
Joyce told the club's official website: "I am delighted to be joining Melbourne City football club at this time in its evolution.
"The people at the club, their vision and their values together with the opportunity to help develop and build this team to its full potential, meant that this was an offer which was impossible to turn down. I can't wait to get started."
Joyce, who made over 600 league appearances as a player between 1983 and 2000, managed Manchester United Reserves between 2010 and 2016 before leaving to join Wigan.