The 55-year-old, who previously spent six years in charge of Villa's enemies Birmingham City, has been named as Roberto Di Matteo's successor.
The Championship club made a managerial change last week after Di Matteo guided the team to just one win 11 league games this season.
Bruce has been out of work since walking away from his job at Hull City just three weeks before the club's return to the Premier League at the beginning of the season.
In his final campaign at the KCOM Stadium, Bruce guided the Tigers back to the top flight with a 1-0 win over Sheffield Wednesday in the playoff final.
Following his appointment at Villa, Bruce told the club's official website: "It's a wonderful opportunity. It is one of the big clubs of this country. To be given the opportunity to manage it is terrific.
"I relish the challenge of trying to take the club where it wants to go and needs to be, and try to turn around the misfortune we seem to have had over the past few years. I am absolutely delighted to have been given the chance. I hope I can do my stuff."
Owner Tony Xia said: "I'm delighted to welcome Steve to the football club. With his track record, not only at leading teams to promotion from the Championship but also vast experience in the Premier League, I believe we have secured the services of an excellent manager. I have had good conversations with Steve and we look forward to working with him."
Chief executive Keith Wyness added: "In the recent transfer window we focused on character, personality and experience. These three words can be applied in spades to Steve Bruce and I look forward to working closely with him as we turn the club around and get us back to where we all want to be."
Villa are currently 19th in the league table.