Sherwood was among the frontrunners for the job after being named interim manager of the north London club following the sacking of Andre-Villas Boas last week.
A statement on Spurs' official website on Monday evening said: "Following the departure of Andre Villas-Boas, the club can announce that Tim Sherwood has been appointed head coach with a contract to the end of the 2014/15 season."
Sherwood was in charge as Tottenham crashed out of the Capital One Cup following a second home defeat to West Ham this season.
But he bolstered his standing by leading the club to a 3-2 victory at Southampton in the Barclays Premier League on Sunday.
The 44-year-old had been the head of football development during Villas-Boas' tenure, and although he has no previous managerial experience it is clearly not an issue for the Tottenham board, who have entrusted Sherwood to lead the club until the end of next season.
Chairman Daniel Levy told the club's official website: "We were extremely reluctant to make a change mid-season, but felt we had to do so in the club's best interests.
"We have a great squad and we owe them a head coach who will bring out the best in them and allow them to flourish and enjoy a strong, exciting finish to the season.
"We are in the fortunate position of having within our club a talented coach in Tim Sherwood.
"We believe Tim has both the knowledge and the drive to take the squad forward."
Sherwood, who made nearly 100 appearances for Tottenham as a midfielder from 1999 until 2003, will be assisted by Chris Ramsey and former Tottenham team-mates Les Ferdinand and Steffen Freund.
Villas-Boas was dismissed a day after Tottenham's 5-0 home defeat against Liverpool.
Despite an earlier heavy defeat at Manchester City last month, the Portuguese had a good record overall as Tottenham manager, averaging 1.83 points per league match, the highest of all Spurs bosses in the Premier League era, while he had a 100 per cent record in the Europa League.
Yet he oversaw a heavy outlay over the summer, in which the club spent over £100million with seven new players arriving at White Hart Lane as Tottenham re-invested the huge transfer fee they received from Real Madrid for Gareth Bale.
Sherwood was among the favourites to take charge as he had the benefit of knowing the players, despite his novice status as manager, while former player and manager Glenn Hoddle expressed his interest.
Ajax boss Frank de Boer and former Real Madrid and Chelsea manager Guus Hiddink were also linked with the post, but the Spurs board opted to give their backing to Sherwood, who will be expected to lead the charge for a top-four finish.