The former Republic of Ireland and Wolves boss has signed a contract to keep him at Portman Road until the summer of 2015, the club confirmed on their official website.
Terry Connor has been named as McCarthy's assistant after the pair worked together at Molineux.
McCarthy, 53, who parted company with Wolves in February after six years in charge, told Ipswich's official website: "I'm obviously delighted to have been given the job as Ipswich Town manager and I'm looking forward to the challenge ahead.
"It's a fantastic football club with a proud tradition and history and a terrific fanbase. While the long-term ambition is to take the club back into the Premier League, it's clear that the first priority is to get some confidence back into the team and start climbing the table."
Town chief executive Simon Clegg said: "I am delighted to welcome Mick and Terry to Portman Road.
"We are under no illusions of the challenge ahead for this club given our position in the table but we feel we have the right manager to lead that challenge.
"Mick has a wealth of knowledge in the game and has shown that he knows how to compete successfully in the Championship in his time at both Sunderland and Wolves.
"While the first task is to guide the club away from our current position, we believe Mick has all the credentials and drive to eventually bring success back to Ipswich Town."
Having played for Barnsley, Manchester City, Celtic and French club Lyon, it was at Millwall where McCarthy's managerial career began.
He was appointed Republic of Ireland boss in 1996, leading them to the World Cup finals in 2002.
McCarthy has a wealth of experience in the Championship having won the title with Sunderland and then Wolves, although Wanderers were firmly lodged in the Barclays Premier League relegation zone when he left earlier this year.