The 63-year-old is appointed as a replacement for Pearson, who was sacked last month despite overseeing a remarkable escape from relegation in the final weeks of the season.
Pearson was sacked due to "fundamental differences" between himself and the board.
Ranieri previously managed in the Premier League with Chelsea, between 2000 and 2004, benefitting from the start of the Roman Abramovich era.
Despite spending vast amounts of money on recruitment, Ranieri was unable to deliver a trophy to the cabinet at Stamford Bridge.
Since then, he has enjoyed spells at the likes of Valencia, Juventus, Roma, Inter, Monaco and Greece.
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