Billy Davies was sacked as Forest boss after two-and-a-half seasons with the Championship club.
McClaren is the man City Ground owner Nigel Doughty has identified to come in and handed the former Middlesbrough manager a three-year deal.
Brolly's back: Steve McLaren has made his return to English football as Nottingham Forest's new manager
A club statement said: 'Nottingham Forest are delighted to announce the appointment of Steve McClaren as manager. The 50 year old has signed a three year contract and will meet the media for the first time as Forest manager on Thursday.
Chief Executive Mark Arthur said: 'The club moved quickly to secure his services as it is rare for a manager and coach of his undoubted calibre to be available.
'Steve has a proven track record of coaching and managing at club level, having played a key role in helping Manchester United secure the Champions League trophy, three Premier League titles and an FA Cup; guided Middlesbrough to the League Cup and also to the final of the UEFA Cup and led FC Twente to their first ever Dutch title.
'We are delighted to have him on board at The City Ground.'
After being sacked by England for failing to reach Euro 2008, McClaren took over at Dutch side FC Twente in June of that year. He helped them to their first ever title two years later before moving to German club Wolfsburg.
Sacked: Billy Davies was dismissed by Forest after failing to win promotion
However, he had been out of work since being sacked by the Bundesliga side in February after an unsuccessful spell.
Despite spending time in the Dutch and German top flights, the prospect of returning in English football's second tier has not put the 50-year-old off.
McClaren, who led Middlesbrough to the UEFA Cup final in 2006, is keen to rebuild his tarnished reputation in this country after that ill-fated stint as England boss.
Hethought his chance would come at Aston Villa after the club's American owner Randy Lerner arranged to meet McClaren for talks over becoming Gerard Houllier's successor.
But Lerner abandoned the planned discussions after being warned about a potential supporter backlash against the prospective appointment of the ex-England boss.
The snub from Villa is said to have angered McClaren but fuelled his determination to return home.
He had been tipped to make a return to FC Twente and also linked with another Dutch side, Vitesse Arnhem.
Andthe fact he has turned down the chance to return to the comfort zone ofHolland to manage in the Championship underlines his determination to prove himself as a top coach in England once more.
Wiganchairman Dave Whelan revealed McClaren would have been his first choiceto replace Roberto Martinez if the Spaniard had taken the Villa job.
Lernerapproached Martinez last week only to be snubbed and Whelan said: 'If he (Martinez) decided to go I would have had to look around for a manager and the first man I would have spoken to would have been Steve McClaren.
'I rated him very highly and I am very surprised Villa haven't moved for him. I don't think you can be influenced by fans.'
WhileMcClaren's decision to take over at the City Ground is a surprise, Davies' sacking was fully expected after a number of run-ins with the club's hierarchy.
Knock-out blow: Forest were beaten in the Championship play-offs by Swansea
A frosty relationship with owner Doughty and chief executive Mark Arthur over what Davies, 47, perceived as a lack of investment in the squad is understood to be behind the Scot's departure.
Daviesfelt his hands had been tied by the club's decision to implement a transfers acquisition committee which had to approve all targets. His failure to deliver promotion to the Barclays Premier League in consecutive play-off losses left him vulnerable.
Doughtyheld two showdown meetings with the Scot over the last few weeks in an attempt to reach an agreement over how to build a third promotion push.
But the fractious relationship between Davies and the Forest board was beyond repair.
?McClaren to return at Forest after Championship club sack DaviesDavies axed as Forest boss with former England boss McClaren in City Ground talksThe 2010/11 managerial merry-go-round: Alex McLeish quits Birmingham - 55 bosses gone this seasonSwansea 3 Nottm Forest 1 (agg 3-1): Swans hold nerve to edge into final
?Explore more:People: Nigel Doughty, Dave Whelan, Billy Davies, Gerard Houllier, Steve McClaren, Roberto Martinez Places: The Netherlands, United Kingdom
Source: Daily Mail
Source: Daily Mail