Italian FA commissioner Roberto Fabbricini said Mancini had proved his "great desire" to become the new Italy coach.
It will be a first role in worldwide management for Mancini, who has left Russian club Zenit St Petersburg to take up the post.
Italy have turned to a former Premier League winning manager to replace Gian Piero Ventura after the Azzurri's failure to qualify for the 2018 World Cup.
Mancini gave Balotelli his senior debut in 2007 during his first stint at Inter and also worked with him when he was in charge of Manchester City. While the current Zenit boss played coy on the appointment to this point, he has officially signed a contract with Italy.
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Before signing the contract with the Italian Federation Mancini agreed with the Russian "Zenith" about the mutual termination of the contract without financial compensation.
During his 10-year global player Mancini was never became a regular in the Italian national side and has won 36 caps scoring only four goals. He will also prepare Italy for a friendly against France on June 1 in Turin which could be the final worldwide game for goalkeeping legend Gianluigi Buffon.
The 53-year-old's management career really took off when he steered Inter Milan to a hat-trick of Serie A titles before making the move to the Citizens. He also won Italian Cups with Inter, Fiorentina and Lazio.
He reached the semi-finals of Euro 1988, and was in the squad that finished 3rd in the 1990 World Cup on home soil.