Eriksson immediately pledged to build a squad capable of delivering results in line with City’s status as one of the best-supported clubs in England.
“This is an exciting challenge and I have already started making preparations for the new season,” Eriksson said.
“I want to deliver a team that our fantastic fans can be proud of.”
Eriksson, 59, has been out of work since stepping down as the national team manager following England’s quarter-final exit from the 2006 World Cup.
Although he was regarded by some as having failed to get the best out of a talented generation of England players, Eriksson has an impeccable record in club football, having won titles in his native Sweden, Portugal and Italy.
“Sven’s vast experience of managing top clubs to success around Europe is one of the qualities that attracted us to him,” City’s chief executive, Alistair Mackintosh said.
“He also knows the English Premier League inside out from his time as national team manager.”
Eriksson was catapulted into pole position to succeed Stuart Pearce at the City of Manchester stadium after Claudio Ranieri, the first choice of the club’s new owner Thaksin Shinawatra, opted to join Juventus.
England under-21 boss Pearce was sacked at the end of last season, which City ended just four points above the relegation zone.
Eriksson’s task of reviving the club’s fortunes has since been made harder by the departure of Joey Barton, the club’s top scorer and best player last season, and former captain and defensive lynchpin Sylvain Distin, as well as Trevor Sinclair, Stephen Jordan, Hatem Trabelsi and DeMarcus Beasley.
Eriksson has reportedly told former Thai premier Thaksin that he needs at least ten new players to make City competitive and a transfer fund in the region of 50 million pounds (700 million kronor, $100 million).