Hoeness signed a deal until June 30, 2025, valid for both the Bundesliga and the second tier Bundesliga 2, Stuttgart said in a statement.
"We appointed Bruno last December because we firmly believed we could initiate a turnaround with him," Stuttgart CEO Alexander Wehrle said.
"Bruno worked with the players with great commitment and passion from day one, but unfortunately it didn't pay off as far as points are concerned. In the end, we decided we needed a fresh spark.
"Sebastian Hoeness already has important Bundesliga experience and we're sure that (he) is the right coach for the challenges facing us and that he'll overcome this difficult situation with the help of the team."
Hoeness coached Bundesliga side Hoffenheim between 2020-22, leaving them ninth in his second season. Earlier he was in charge of Bayern Munich's Under-19 and reserve teams.
Stuttgart, who sit bottom of the standings on 20 points from 26 games, managed only two wins under Labbadia - a 2-1 victory over second-tier Paderborn in the last 16 of the German Cup and a home 3-0 Bundesliga win against Cologne.
