Aloisi, who is the only Australian to have played in the English Premier League, Spain's La Liga and Italy's Serie A, was preferred to Heart assistant coach Ante Milicic.
"I'm honoured and delighted to have been appointed head coach of Melbourne Heart FC," said the 36-year-old, who joined the club coaching staff when he retired from playing at the end of the 2010/11 season.
"The club is well positioned to succeed, with an exciting young core at the heart of our team, and I'm confident we will be able to build on last season's success over the next few years."
He replaces John van't Schip, who stepped down after leading the Heart through their first two seasons in the A-League. Van 't Schip has since signed a two-year deal with Mexican club Guadalajara.
Aloisi ranks as one of Australia's most successful football exports, earning 55 caps for the Socceroos and playing for a host of clubs including Portsmouth, Coventry, Antwerp, Standard Liege and Osasuna.