The 53-year-old has signed a two-and-a-half-year deal with the Blues and replaces Harry Redknapp in the St. Andrew's dugout.
Redknapp was sacked earlier this month after Birmingham got just four points from their opening eight league games.
Cotterill was Redknapp's assistant at the club last season but decided not to stay in the role for this campaign.
The club's chief executive Xuandong Ren told the club's official website: "We have every faith in Steve Cotterill to help us achieve the ambitions we all share."
It was also confirmed that caretaker boss Lee Carsley will remain at the club as Cotterill's assistant.