After spells as manager at several clubs including Brighto, Wolves and Leicester he has returned north and replaces Maurice Malpas, who left the Premier League club earlier this month.
Ex-Newcastle Striker Takes Over At Motherwell
McGhee will be supported by assistant manager Scott Leitch and head of youth development Chris McCart.
McGhee: "I'm delighted to return to Scotland as manager of Motherwell.
"I am determined that from next season the team will give its absolute best to deliver the kind of results the supporters rightly expect.
"Motherwell has shown it is a team that is quite capable of punching above its weight and anyone who knows me will know that no effort will be spared in making sure that we perform at our best on a regular basis."
Majority shareholder John Boyle added: "We undertook an exhaustive search for a new manager and believe that Mark's excellent combination of skill, experience and motivation made him an outstanding candidate for the job. We are delighted to welcome him to Fir Park.
"We think this appointment gives us a great foundation for the future and our supporters can look to next season with renewed confidence and optimism."
He has been out of Scottish football since leaving Celtic in 1989.
His managerial career began well at Reading and Leicester but he left both clubs after brief spells to move on to better things before being sacked as Wolves boss in 1998.
He has since managed Millwall and Brighton before being dismissed as Albion boss in September last year.
The 50-year-old's record includes promotions with Reading, Millwall and Brighton and now he has the chance to test himself in Scotland's top flight.
*1977/1978 and 1988/91 M.E.McGhee 99/13 36
Two spells at Newcastle and they couldn't possibly have been so different. He came from Morton for £150,000 and looked as though he had the skill to make it, but always failed to deliver. He lacked strength and pace. But he went to Aberdeen and became a superstar. Capped by Scotland, he won Scottish Championships and Scottish Cups with both Aberdeen and Celtic. As well as European Cup Winners Cup medal with Aberdeen. Signed for Newcastle for £200,000 and hit it off with Micky Quinn straight away.