Smith, who developed a reputation for playing exciting, attacking football at Brentford, is a Villa fan and will replace Steve Bruce, who was sacked last week following the second tier side's dismal start to the season.
He had been without a club since leaving Villa following their playoff defeat by Fulham at Wembley Stadium last season.
Villa has also appointed Jesus Garcia Pitarch as Sporting Director.
"These three appointments represent the start of a new era and direction at Aston Villa and we are delighted to secure their services after an extensive search," Villa CEO Christian Purslow said.
"Dean has a clear and successful coaching philosophy as well as a real understanding of Aston Villa Football Club. He is also knowledgeable about the Championship...
"John is one of the most decorated players in English football, has an affinity with the club and is ready to make the next step in his career working alongside Dean."
Villa is 15th in the Championship with three wins in their opening 12 games.
(With inputs from agencies.)