Clarke was axed by West Brom last December, but has signed a two-and-a-half-year contract with the Royals.
Clarke with Shearer in his Newcastle days
He takes over a side who are 16th in the Championship table following Saturday's 6-1 thrashing at Birmingham.
Clarke (talking on the Royals' official website): "I am absolutely delighted to be joining Reading Football Club and I look forward to helping the club move in the right direction.
"A big part of the work ahead is on the training ground and I look forward to meeting the players and getting onto the grass with them. There is real potential here and hopefully exciting times ahead for the supporters."