The former Newcastle midfielder will take charge on Feb. 1 after being chosen ahead of two other former Northern Ireland internationals, Jim Magilton and Iain Dowie, as the replacement for Nigel Worthington.
The 42-year-old O'Neill came to prominence this season by leading Shamrock Rovers into the group stages of the Europa League — an unprecedented achievement for a club from Ireland. He quit as manager this month, fueling speculation he would be taken on by Northern Ireland.
"To be entrusted with the role early in my managerial career is quite humbling but I am confident that we can make progress," he said.
"Northern Ireland has a strong football tradition but one that needs to be refreshed with some contemporary success." A country with a current population of less than 2 million, Northern Ireland has qualified for three World Cups — in 1958, '82 and '86 — but has struggled since. It is currently 88th in the FIFA rankings.
The late George Best is Northern Ireland's most-famous ever player but the current crop lacks any star names, with Manchester United defender Jonny Evans and West Bromwich Albion midfielder Chris Brunt its leading players.
After a bright start, Northern Ireland finished fifth in its six-team qualifying group for the 2012 European Championship, below the likes of Estonia and Slovenia.
"There is a huge amount of work to be done but with the right direction and the necessary passion, good progress can be made," O'Neill said.
"My job is to work with the players to sustain a competitive performance throughout the qualifying phase of the 2014 World Cup finals." A Newcastle player alongside former England midfielder Paul Gascoigne during the late 1980s, O'Neill also won 33 caps for his country during a nomadic playing career that comprised 13 clubs.
He has managed Brechin in the Scottish third tier and then Shamrock in his brief coaching career since 2006, leading the latter club to two national titles.
"The selection panel was very impressed with his thoughts and plans for football in Northern Ireland over the coming years," Irish FA chief executive Patrick Nelson said.
O'Neill's first game in charge will be a home friendly against Norway on Feb. 29.
Northern Ireland was drawn alongside Russia, Portugal, Azerbaijan, Israel and Luxembourg in its World Cup qualifying group.
