Chelsea made the announcement on Wednesday, bringing to an end a three-week search since Avram Grant was sacked as coach following the club's Champions League final defeat to Manchester United in Moscow on May 21.
Scolari, 59, who led Brazil to World Cup victory in 2002 but has never before managed a European club, will become the fourth manager at Stamford Bridge since Russian billionaire Roman Abramovich bought the London club in 2003.
British media reported that Scolari will be on a four year contract, with a salary of up to $13 million per year and a vast transfer budget. However, the job comes with enormous pressure to produce top results, not only in the domestic league but also in Europe.
While Italian coach Claudio Ranieri failed to produce the instant success expected of him when Abramovich took over the club, his successor Jose Mourinho led Chelsea to its first top-flight domestic title in half a century, and retained the Premiership title in 2006. However, he left the club amid a power struggle with the Russian tycoon.
The pressure and instability of the Chelsea manager's job are believed to have persuaded AC Milan's Carlo Ancellotti and Inter's Roberto Mancini to turn down offers for the post.
Like Ranieri, Scolari faces a major challenge in stamping his authority at the club, with his limited knowledge of English.
Chelsea said on its website that Scolari will take over on July 1.
"He is one of the world's top coaches with a record of success at country and club level, he gets the best out of a talented squad of players and his ambitions and expectations match ours. He was the outstanding choice," the statement said.