Sherwood had been named as interim coach after Andre Villas-Boas was sacked earlier in December following a 5-0 defeat to Liverpool.
“Following the departure of Andre Villas-Boas, the Club can announce that Tim Sherwood has been appointed Head Coach with a contract to the end of the 2014/15 season,” said a club statement.
The 44-year-old Sherwood had overseen a 3-2 over Southampton on Sunday.
Chris Ramsey, Les Ferdinand and Steffen Freund will work alongside the former England international midfielder.
“We were extremely reluctant to make a change mid-season, but felt we had to do so in the club’s best interests,” said Spurs chairman Daniel Levy.
“We have a great squad and we owe them a head coach who will bring out the best in them and allow them to flourish and enjoy a strong, exciting finish to the season.
“We are in the fortunate position of having within our club a talented coach in Tim Sherwood.
“We believe Tim has both the knowledge and the drive to take the squad forward.”
Sherwood played 93 matches for Spurs between 1999 and 2003 and also turned out for Blackburn, Norwich, Portsmouth, Watford and Coventry before hanging up his boots in 2005.
He made his mark on Sunday when recalled striker Emmanuel Adebayor, left out in the cold by Villas-Boas, scored twice.
The win left Tottenham in seventh place, four points off the Champions League places.
Sherwood had said after Sunday’s game that he wanted his future sorted out as soon as possible.
“What would be ideal for me would be to have a chat with the chairman and see what’s best for the football club moving forward,” he said.
“I need to know what they’re thinking. I don’t want this job for five minutes. That’s no interest to me. Are we going to move it forward or not?
“It’s a massive club with history and tradition. But whatever happens needs to be right for me, too.
“Andre has left the club in a good state. There’s nothing wrong with the job he’s done. Top of the league in the European competition (Europa League).”
A host of names had been linked with the Tottenham job including Ajax boss Frank De Boer, Guus Hiddink, Fabio Capello and Glenn Hoddle.
Capello is on the verge of signing a new deal to stay with the Russian national team until the 2018 World Cup.