The appointment took place Sunday immediately after Sunderland sacked O'Neill following the team's 0-1 loss to Manchester United. Di Canio will take charge from Monday.
Sunderland are now without a win in their past eight matches in the Premier League and sit a point above the relegation zone.
"Sunderland AFC have confirmed the appointment of Paolo Di Canio as Head Coach on a two-and-a-half year deal," the club said in a statement.
The 44-year-old Di Canio has scored more than 100 goals in over 500 appearances as a player with Lazio, Juventus, Napoli, AC Milan, Celtic and West Ham among others.
Di Cani, who retired in 2008, was appointed manager of Swindon in 2011 and he led the team up a division into the third tier the following year.
--IANS (Posted on 01-04-2013)