The Tractor Boys, who parted company with Paul Jewell last week, interviewed several candidates on Tuesday but settled on the former Wolves and Sunderland boss.
McCarthy's contract runs until the summer of 2015 and he will be assisted by Terry Connor, who stepped in to replace him when Wolves sacked him in February.
“I’m obviously delighted to have been given the job as Ipswich Town manager and I’m looking forward to the challenge ahead,” said McCarthy.
“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.”
Town find themselves cut adrift at the foot of the table following a 12-match winless sequence and a club-record run of 10 league games without a home victory which stretches back to March.
Town chief executive Simon Clegg added: “I am delighted to welcome Mick and Terry 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.
“While the first task is to guide the Club away from our current position, we believe Mick has all the credentials and drive to eventually bring success back to Ipswich Town.”
Former Ipswich captain Matt Holland, meanwhile, insists he has had no contact with McCarthy regarding a place among Town's coaching set-up.
Holland, who played under McCarthy at international level, was heavily tipped for involvement among the backroom staff as he works towards his coaching badges.
Using his Twitter account, Holland wrote: "Excellent appointment by #ITFC - Mick McCarthy is a very good manager and as honest as they come. The very best of luck to him and Terry.
"He also has a very dry sense of humour and will put a smile back on the players faces. 3 points on Sat now! #coyb
"And for the record I haven't spoken to him. He has far more pressing issues - like getting #ITFC off the foot of the table!"
McCarthy has appointed Terry Connor as his assistant having worked together at Wolves. Connor himself took over at Molineux as interim boss in the wake of McCarthy's sacking in February before being given the boot in early September having reverted back to number two under Stale Solbakken.