The 59-year-old Galatasaray manager has signed a one-year contract to replace Abdullah Avci, who stepped down from his post earlier this week.
Terim, who also coached Turkey between 1993-96 and 2005-09, will take up the post for the remainder of the country's 2014 World Cup qualifying campaign while continuing as coach of Galatasaray.
Turkey are currently fourth in qualifying Group D on seven points after six games, 11 points behind leaders Holland, four behind second-placed Hungary and three adrift of Romania with four matches remaining.
Turkish Football Federation president Yildirim Demiroren said on the TFF's official website: "Turkish football has many problems, especially at youth level.
"Therefore, we wanted to appoint Mr Terim as the national team head coach who can solve these problems with his experience, successes in the past and his passion.
"I am thankful to Galatasaray president Unal Aysal and the club for giving permission to their coach for this job. The new period in Turkish football has begun."
Terim added: "You can't escape the responsibility of leading your country. However, without team work nothing is possible. Everyone needs to pull together to help us achieve our goal. I hope to build a team that can qualify for this World Cup and more to come."