The 40-year-old Spaniard, also Garry Monk's number two at Swansea, replaces Michael Appleton at the Kassam Stadium.
Appleton, after leading Oxford into Sky Bet League One during the 2015-16 campaign, opted to leave the club last month to become assistant to Craig Shakespeare at Leicester.
Clotet has previous managerial experience at Cornella, Figueres, Espanyol B and Malaga B in Spain as well as Swedish side Halmstad.
"I am delighted that Pep has chosen to launch his managerial career at Oxford United," chairman Darryl Eales told the club's official website.
"It is an appointment that demonstrates our growing reputation within football as a forward-looking and ambitious club.
"Pep is a proven coach, progressive and hugely knowledgeable, and I believe we are fortunate to have attracted such a highly-regarded individual who is destined for an outstanding managerial career.
"Pep was the unanimous choice of the board and we believe he will build on the significant progress we have made over the past three years and accelerate our collective objective of sustainable Championship status."
Clotet announced on Twitter last month that he would not be linking up again with Monk at Middlesbrough.
He said: "I'm really thrilled to be embarking on this new challenge at a club as ambitious as Oxford United.
"It's an exciting prospect and I'll be giving my all to ensure that as a team, and with the fans' support, we go on and achieve the targets we set ourselves.
"I wish to thank the chairman, Darryl Eales, and his board of directors for placing their faith in me."