The 53-year-old, who was sacked from Wolverhampton Wanderers in February, has been expected to be named as the Tractor Boys' new boss following a number of successful discussions with the club's board.
"I'm obviously delighted to have been given the job as Ipswich Town manager and I'm looking forward to the challenge ahead," McCarthy told the club's official website.
"It's a fantastic football club, with a proud tradition and history and a terrific fanbase. While the long-term ambition is to take the club back into the Premier League, it's clear that the first priority is to get some confidence back into the team and start climbing the table."
Chief executive Simon Clegg added: "I am delighted to welcome Mick and Terry [Connor] to Portman Road. We are under no illusions of the challenge ahead for this club given our position in the table but we feel we have the right manager to lead that challenge.
"Mick has a wealth of knowledge in the game and has shown that he knows how to compete successfully in the Championship in his time at both Sunderland and Wolves."
McCarthy, who has signed a contract until 2015, will be joined by Connor, who acted as the coach's assistant manager at Molineux.