Former DC United coach Rooney replaces John Eustace, who was sacked on Monday with the Midlands side sixth in the standings -- 12 points behind runaway leaders Leicester City.
"I have been building my managerial career, putting myself in challenging environments, to get me ready for this opportunity. It's a project that gives me a sense of purpose and I can't wait to get started," Rooney said in a statement.
"I have a clear way that I want the team to play, and my coaching staff and I will work hard to implement it. We will create a winning culture here with an identity that gets Blues fans on their feet."
Rooney will be supported by former England teammate Ashley Cole and ex-United teammate John O'Shea, who will both keep their assistant coaching roles with the England under-21 and Ireland senior teams, respectively.
Rooney stepped down as manager of Major League Soccer (MLS) club DC United last week after they missed out on the MLS Cup playoffs for the fourth consecutive year.
Prior to his stint with DC United, Rooney had a 17-month spell in charge of Derby County where his team collected 55 points -- enough for survival -- but were relegated to the third tier after points were deducted amid financial trouble.
"Wayne has been preparing for an opportunity like this since he embarked on his coaching education whilst still a player at Manchester United," Birmingham chairman and co-owner Tom Wagner said.
"He and his staff have the full support of the Board and everyone at the football club."
As a player, Rooney scored 253 goals for United, won five Premier League titles and the Champions League with the Old Trafford club. He also scored 53 goals for England's national team.
Birmingham, who last played in the top flight Premier League in 2011, have 18 points from 11 games. They next play away at Middlesbrough on October 21st.
