Spaniard Benitez, the former Valencia, Liverpool and Inter Milan coach, becomes the ninth manager under Russian owner Roman Abramovich.
He will be tasked with salvaging their season after a run of two wins from their last eight games left them off the pace in the Premier League and facing elimination at the group stage of the Champions League six months after winning the ultimate club trophy for the first time.
"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," Chelsea said in a statement.
The 52-year-old is due to meet the players at the club's training ground on Thursday, when there could be some interesting exchanges on the back of his lengthy and often fiery rivalry with Chelsea during his six years in charge of Liverpool.
During that time he won the 2005 Champions League, following the "miracle of Istanbul" when Liverpool came from 3-0 down to AC Milan at halftime to draw 3-3 and win on penalties.
They also reached the final in 2007, losing to Milan having beaten Chelsea in the semi-finals, and won the FA Cup in 2006.
At Valencia, Benitez won the Spanish league twice and the UEFA Cup but he has been without a club since being sacked by Inter in December 2010 after six months in the job.
Local media speculation on Wednesday was that Chelsea would appoint a temporary manager to fill the gap until former Barcelona boss Pep Guardiola potentially becomes available following a one-year sabbatical from the game.
Factbox on Rafael Benitez
* Born in Madrid, April 16, 1960.
* After a knee injury forces him into premature retirement ending a modest playing career, Spaniard Benitez begins coaching in the Real Madrid youth section.
* From 1993 to 2001 he coaches Real Madrid B, Valladolid, Osasuna, Extremadura and Tenerife.
* 2001/02 - Leads Valencia to their first league title in 31 years in his first season in charge. The club wins La Liga again in 2004 and beat Olympique Marseille 2-0 in the UEFA Cup final to win their first domestic and European double.
* 2004, June 16 - Liverpool confirm Benitez appointment.
* 2004/05 - His first season ends in triumph with the unforgettable Champions League final victory over AC Milan in Istanbul when his side overturn a 3-0 halftime deficit to draw 3-3 and win on penalties.
* 2005-06 - Liverpool beat West Ham in the FA Cup final.
* 2006-07 - Liverpool reach the Champions League final again in Athens, but end up losing to AC Milan.
* 2009-10 - A poor season ends with Liverpool seventh in the Premier League and they also fail to negotiate the group stage of the Champions League.
* 2010, June 3 - Benitez leaves Liverpool by mutual consent and a week later joins European champions Inter Milan.
* Inter stick with the same treble-winning squad but injuries begin to bite and form soon dips with a derby defeat by AC Milan one of their worst performances for years.
* Benitez leaves after just six months in charge despite winning the World Club Cup after a row with president Massimo Moratti.
* Appointed as interim boss of the European champions after Roberto Di Matteo is sacked following a 3-0 defeat at Juventus which leaves them on the brink of Champions league elimination.
more in Sports