The Baggies, relegated from the Premier League last season, have been without a manager since Mowbray left for Scottish Premier League giants Celtic on 17 June.
West Brom chairman Jeremy Peace said: "I am delighted with Roberto's appointment, which concludes an intensive selection process during which over 40 names were considered.
"We shortlisted two outstanding candidates, spoke to both of them after receiving permission from their clubs, and ultimately Roberto was the unanimous choice of the board."
Born in Switzerland, Di Matteo made 34 appearance for Italy during an impressive playing career that was cut short by injury in 2002.
He joined Chelsea from Lazio in 1996 and became a firm favourite at Stamford Bridge before he was forced to retire at the age of 31.
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