Spaniard Mel, 50, held talks with West Brom in December but was ruled out after it became clear he wanted to bring his own backroom staff.
After three years in charge of Betis, Mel was replaced by Juan Carlos Garrido at the start of December.
Mel is set to work with Baggies assistant head coach Keith Downing, who has been caretaker manager for the last five matches, and goalkeeper coach Dean Kiely.
Downing will remain in charge for Saturday's game at Southampton, where Mel will watch from the stands.
Mel will take the team for the first time for the home game against Everton on 20 January.
West Brom, who face Aston Villa, Liverpool and Crystal Palace after the games against Southampton and Everton, are 14th in the Premier League, four points above the relegation zone.
Sporting and technical director Richard Garlick said: "I'm delighted to welcome Pepe to the club.
"His appointment concludes an extensive recruitment process during which we have cast the net far and wide to identify the most suitable candidate to take the Club forward.
"Pepe was a strong contender from the outset due to his impressive achievements and has emerged as our number one candidate.
"He is a forward-thinking coach whose teams are renowned for playing an attractive and positive style of football."
Former Betis striker Mel was appointed manager of the club in 2010 and guided them back into La Liga as Segunda Division champions 12 months later.
Betis finished seventh in La Liga last season but Mel was sacked after a run of eight domestic games without a win, with just two victories in all competitions before the start of December.
Mel has also had spells at eight other clubs, including Tenerife, Alaves and Rayo Vallecano, in his 14-year coaching career.
Clarke was sacked following four straight defeats and after guiding West Brom to just seven wins in 34 Premier League games in 2013.
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