Owner and chairman Fawaz Al Hasawi confirmed the appointment via Twitter ahead of a 12.30pm press conference.
He wrote: "I am absolutely thrilled to confirm Stuart Pearce will become our manager on 1 July. Welcome home . #nffc"
Former Forest favourite Pearce, whose last role was with England's Under-21 side, initially turned down the job following talks last week, citing family reasons.
Forest have been looking for a new boss since Al Hasawi dismissed Billy Davies on March 24 following a run of eight matches without a win, culminating in a 5-0 loss to bitter rivals Derby.
The Reds currently lie seventh in the Sky Bet Championship, two points adrift of a play-off place with seven games remaining.
The 51-year-old Pearce spent 12 years with Forest as a player and admitted on Wednesday that he still had a lot of affection for the club.
''Forest have always been well supported whatever league they've been in, there's a rich history there,'' he said.
''It's a great club and one that's very close to my heart.''
Gary Brazil is in temporary charge of first-team affairs at the two-time European champions and looks likely to remain at the helm until the end of the season.
When asked about his apparent change of heart, Pearce said: "I wouldn't call it a U-turn. At the time it was suggested I had so much on of a personal nature - commitments with the World Cup etc - and it wasn't the right time.
"When they came back and asked me if I would take it from the summer I jumped at the chance. Everything seems right.
"I want the whole club to be as one, right down to every employee. They have to take an interest in this club."
Delighted owner Al Hasawi added: "I am really happy to have Stuart as boss. He is a very good manager, he has a good CV and I wish him all the best with us. I am really happy as chairman and owner and for the fans because they like him.
"We are looking forward to him starting in the summer.
"I was waiting to pick the right manager and Stuart is the right manager."