Previous manager Roberto Di Matteo was sacked on Wednesday following the 3-0 Champions League defeat by Juventus.
Benitez’s short-term appointment could pave the way for owner Roman Abramovich to make a summer approach for ex-Barcelona coach Pep Guardiola.
Benitez, 52, becomes the Blues’ ninth manager since Abramovich took over in 2003.
A Chelsea statement said, “The owner and the board believe that in Benitez we have a manager with significant experience at the highest level of football, who can come in and immediately help deliver our objectives.”
The Spaniard, who has been out of work since he was sacked by Inter Milan in December 2010 after just six months in charge, is due to meet the players at the training ground in Cobham on Thursday.
Benitez joined Liverpool from Valencia in 2004 and won the Champions League in 2005, as well as reaching the final in 2007, before leaving Anfield by mutual consent in 2010.
Di Matteo was sacked following the 3-0 Champions League defeat by Juventus.
Owner Roman Abramovich is known to be a long-term admirer of Pep Guardiola but it is unclear whether the former Barcelona coach can be tempted back into management so soon.
In the statement announcing Di Matteo’s sacking on Wednesday morning, Chelsea said they hoped to announce a new manager “shortly” and that was eventually fulfilled by night.
Di Matteo won the Champions League and FA Cup as caretaker manager last season and was given a two-year deal in June.
But following the defeat to Juventus, which has left the Blues on the brink of a Champions League exit, he has left Stamford Bridge after just eight months in charge.
Chelsea sit third in the Premier League table, four points behind leaders Manchester City, who they host at Stamford Bridge on Sunday.
Chelsea, who have just signed their ninth manager since Abramovich took over in 2003, contacted Benitez before Tuesday’s defeat in Italy.