Holloway has agreed terms a two-and-a-half-year deal and will take charge of the Championship strugglers for Saturday's trip to Huddersfield Town.
The 50-year-old resigned as manager of Millwall's south London rivals Crystal Palace earlier this season, having guided the Eagles to the Premier League.
Holloway quit the Selhurst Park job saying he could not turn the team around after their poor start to the season.
Millwall sacked Steve Lomas on Boxing day after their difficult first half of the season which sees them currently 21st in the Championship table and now out of the FA Cup following a 4-1 drubbing at Southend last Saturday.
Holloway has previously managed Bristol Rovers, Queens Park Rangers, Plymouth Argyle, Leicester City and Blackpool.
"Millwall Football Club can confirm that terms have been agreed with Ian Holloway for him to become new manager," confirmed the club on their website.
"Ollie is set to take up his new position this week and will be in charge of the team for the Championship fixture at Huddersfield Town on Saturday."
Lions chairman John Berylson feels he has found the right man to guide them up the table following Lomas' brief and disappointing spell in charge.
The American also promised to back Holloway in the transfer market this month.
He told the club website: "The fact that we have been able to attract someone of Ian's calibre and track record is testament to the fact that he shares our view of the potential we have to progress as a club and to move forward.
"In our determination to bring Ian in on a two-and-a-half-year contract, we have demonstrated both the level of our ambition and commitment towards re-establishing ourselves as a competitive Championship club, and in due course challenging towards the top end of this division.
"We are under no illusions that our first priority under Ian's leadership is to ensure we maintain our Championship status.
"The new manager inherits an experienced and talented squad that has not been playing to its potential so far this season. He will receive the backing of the board to strengthen as he deems necessary."