He will continue in his role as assistant to Roy Hodgson in the England international set-up.
Valencia are to unveil their new boss at a press conference on Thursday.
Since the former England international retired during the 2010/11 season, the 40-year-old has become an acclaimed pundit with Sky Sports and worked as a coach under national team manager Roy Hodgson.
There had been rumours Neville was to take on the job at Fulham.
Gary will take up his position on Sunday after the Barcelona fixture and his first game in charge will be the Champions League tie against Olympique Lyonnais at Valencia's home, the Mestalla, the following Wednesday.
He said: "I am excited and I am proud to have received this huge opportunity with Valencia Football Club. It is a huge club, of immense prestige and I remember well from my time as a player, the passion and loyalty of their fans.
"I'm looking forward to working with them, I know it's a group of very talented players. I am very excited about the challenge that lies ahead together."
Brother Phil was recently named caretaker boss in the wake of the departure of Nuno Espírito Santo. It is not clear what his role will be in the new managerial set-up.
The Neville brothers have close ties with Singaporean businessman Peter Lim, who owns the club.
He has a 50 per cent stake in Salford City, with the rest split between Ryan Giggs, Nicky Butt, Paul Scholes and the Nevilles.
Valencia president, Chan Lay Hoon welcomed the new coach, he said: "We are delighted to have signed Gary as quickly.
"He is a person who combines technical expertise as part of the coaching staff of the England team and a brilliant playing career at Manchester United and his team."
She added: "Throughout his career, Gary has always shown a high level of leadership on and off the field. He is greatly respected in the English football and have been these qualities that have convinced us that it is the right choice to lead the team until the end of season."
Gary Neville played over 600 times for Manchester United and was capped 85 times for his country.
He won numerous trophies including eight league championships and two champions leagues.
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