The Porto Alegre club took to its Twitter feed to confirm the appointment.
Scolari has already coached the club twice before in 1987 and from 1993 to 1996.
He led Gremio to the Copa Libertadores crown in 1995 and the Brazilian championship a year later.
The 65-year-old, who was replaced as Brazil coach by Dunga, endured a miserable World Cup as his side were humiliated 7-1 by Germany in the semi-finals before losing 3-0 to the Netherlands in the third-place play-off.
However, he was the coach who led Brazil to their last World Cup triumph in 2002 in Japan and South Korea.