Thierry Henry and Rui Faria had both been in the running to replace Steve Bruce - who was sacked last week - but the pair both opted against entering the race to take on the main role in the Villa Park dugout.
That has resulted in Villa moving to appoint Smith - a boyhood supporter of the club - with the Chelsea legend being named as the 47-year-old's assistant after playing for Villa last season.
Villa have also revealed that Jesus Garcia Pitarch has been appointed as sporting director having previously held similar positions at Valencia and Atletico Madrid.
Smith leaves Brentford having won 57 of his 143 matches in charge and returns to the West Midlands after managing Walsall between 2011 and 2015.
Villa - who sit in 15th place in the second-tier standings - are next in action when they host Swansea City on October 20.