The 45-year-old Irishman will succeed Jacques Brunel and officially begin work in June, with O’Shea’s coaching team confirmed as including former England attack specialist Mike Catt.
Catt returns to rugby after leaving his post as an England assistant coach in December following the host nation’s spectacular 2015 World Cup flop when they failed to progress beyond the pool stage.
Catt, together with fellow assistants Andy Farrell and Graham Rowntree, departed the Rugby Football Union, with new England head coach Eddie Jones recruiting Steve Borthwick and Paul Gustard to work with him.
Harlequins rugby director O’Shea, meanwhile, had been strongly linked to the Italy job for several months, so his appointment comes as no surprise.
His first task will be to help oversee Italy’s summer tour to Argentina, the United States and Canada, that features one Test match in each country.
The Azzurri this season finished bottom of the Six Nations Championship for an 11th time in 17 years. They conceded 224 points and 29 tries in five games, while their final two fixtures against Ireland and Wales saw them beaten 58-15 and 67-14, respectively.
In a statement posted on the Italian Federation and Harlequins websites, O’Shea said: “As I said when I announced that I would be leaving, I feel the end of this season is the right time for me to take on a new challenge.
“And I am honoured, humbled and excited that I will be working with everyone in Italian rugby to ensure they can achieve on the undoubted potential they have as a rugby nation.
“I spent many years in the 1990s playing against a great Italian side, and I know there is the ability and will within this current group of players and the FIR to ensure that the current team can become the best Italian team in its history, but that is for another time.”
Quins, winners of the Aviva Premiership title in 2012 under O’Shea’s direction, say they will announce a new director of rugby “in due course,” and will not make any comment until such time.
The London club currently lie sixth in the Premiership, five points adrift of the title play-off zone, while they face a European Challenge Cup home quarter-final against strugglers London Irish next month.
Stephen Aboud, currently the IRFUA’s head of technical direction, has also been appointed by the FIR as head of training, from August 1.
FIR president Alfredo Gavazzi added: “The appointment of this new head coach, his assistant and the head of training is a crucial turning point for the Italian Rugby Federation.
“We have identified three of the highest-profile figures, three men who are in possession of what we believe are the most suitable qualities that can contribute to the development of our team.
“O’Shea is a coach with a record of success on the pitch and strong managerial skills, who will add extra value to all the various components of the Italian rugby set-up. We are excited to give Conor, Mike Catt, and Stephen Aboud, who will play a crucial role in the development of Italian rugby, a warm welcome.”