The former Republic of Ireland manager was last in work at the end of 2021 when he was sacked by Cardiff following 10 months at the club.
McCarthy will be joined at Blackpool by long-serving assistant Terry Connor and the pair will be tasked with turning around the form of the Seasiders, who have dropped into the Championship relegation zone after going nearly three months without a league win.
"I'm delighted to be here, I'm delighted to be back in the game," McCarthy said.
"I'm thrilled to be back up at a club where I've had many battles in the past and hopefully we can achieve some of the similar success of those years."
Blackpool sacked Michael Appleton earlier in the week following defeat away to Watford on Saturday, which extended their winless run in the division to 10 matches.
Chief executive Ben Mansford said: "We believe appointing Mick gives us that opportunity. Mick has extensive experience at the highest level including over 700 games at Premier League and Championship level, along with recently taking on a similar challenge at Cardiff.
"From the initial contact with Mick, you sensed an excitement to come to Blackpool yet a calmness and confidence about the job ahead.
"Mick referred to our superb support from the first conversation and how important the fans will be for the remaining 19 games, starting against Huddersfield on Saturday."
Sporting director Chris Badlan referenced McCarthy's contract length and admitted the appointment of the 63-year-old former Wolves, Sunderland and Ipswich boss will give Blackpool time to formulate a long-term vision.
He said: "I'd like to welcome Mick and Terry to Blackpool. They are two hard-working, honest people who will do all they can to give everyone a lift and I hope the supporters will get behind them.
"This appointment gives us the best opportunity to maintain our Championship status.
"As a club, it also gives us the time to look towards the long-term vision as we continue to plan for an exciting future here at Blackpool Football Club."