Owners David Sullivan and David Gold have turned to the former Bolton Wanderers, Newcastle United and Blackburn Rovers manager to guide them to promotion back to the Barclays Premier League at the first attempt.
The 56-year-old replaces Avram Grant, who was sacked minutes after West Ham's relegation was sealed by a 3-2 defeat at Wigan Athletic a week before the end of the season.
"It is an honour to be the new manager of West Ham United. It is a fantastic club with a great tradition and loyal supporters who deserve to be in the Premier League," Allardyce told the club's official website.
"I can't wait to begin pre-season training as I am determined to get this club back where it belongs."
He added: "I wouldn't have taken this job if I didn't think we could bounce straight back into the Premier League. More than that, I wouldn't have contemplated the job if I didn't think there was the opportunity to build something substantial at West Ham.
"I know there will be West Ham fans asking whether I'm going to abandon the style of play that's been the club's heritage over the years. All I'll say is it will be a tale of home and away.
"At Upton Park we'll attempt to play the kind of passing game the fans want. We will aim to continue in the same way on our travels but we'll also be tough, hard to beat and utterly resilient."
Allardyce will spend the next month refining his new squad and identifying transfer targets. He also intends to make good use of the club's top academy players in the season ahead.
He said: "There is a core of very talented young players at the club who've come up through the youth system, have West Ham in their blood and who I know I can build a successful team around.
"That's what I'm looking forward to, managing a club that wins more games than it loses and competing at the top of the table. We need to create a winning mentality and give the fans a team they can be proud to watch."
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