Favre stepped down as Nice coach last week amid speculation linking him with the Dortmund job.
The 60-year-old Swiss has previously coached Hertha BSC and Borussia Monchengladbach in the Bundesliga, helping the former to fourth place in 2008/09 and saving the latter from relegation in 2011/12.
“Coaching Borussia Dortmund is an exciting task that I’m delighted to take on,” Favre said on the Dortmund website.
“I’d like to thank the directors for the faith they’ve shown in me. We’ll now work together on the new team.
“BVB is one of the most interesting clubs in Europe and I’m looking forward to returning to the Bundesliga, which I know extremely well and always kept an eye on during my two years in Nice.”
Favre will replace Peter Stoger, who signed a short-term deal as Dortmund coach in December following the sacking of Peter Bosz.
🤝 Lucien #Favre wird Cheftrainer beim BVB!— Borussia Dortmund (@BVB) 22 May 2018
Der 60-jährige Schweizer erhält einen Vertrag bis 2️⃣0️⃣2️⃣0️⃣!
🗯 "Borussia Dortmund zu trainieren, ist eine reizvolle Aufgabe, die ich sehr gerne übernehme!" pic.twitter.com/h7v0G1Lb6f
Stoger helped Dortmund recover from eighth place to qualify for the Champions League as they finished in fourth, beating Bayer Leverkusen to Europe’s premier competition on goal difference.
However, the Dortmund hierarchy were keen to go in a new direction this summer.
“The appointment of Lucien Favre as coach is an important aspect of our fresh sporting start this summer,” said sporting director Michael Zorc.
“He’s highly regarded by us for the technical qualities that he demonstrated in impressive style many times throughout his spells with Hertha BSC and Monchengladbach in the Bundesliga, and more recently with Nice.”
The wideman excelled during his sole season at the Westfalenstadion, scoring 10 goals in 49 games for the Bundesliga giants after moving from Ligue 1 side Rennes.
The Blaugrana moved for the 20-year-old after losing Neymar to Paris Saint-Germain, but Dortmund stalwart Weidenfeller was not happy with the way Dembele conducted himself as he sought a transfer, branding his behaviour “ridiculous”.
“That’s not the way to leave a club,” the goalkeeper told ESPN of Dembele’s departure. “It caused unbelievable unrest and nobody could calm down.
“This is a team sport – football is not tennis. He did not even take his boots [before leaving] – it’s ridiculous. Before, I could not imagine that there is such a thing.”
Weidenfeller, 37, has spent almost his entire career in Westphalia, joining BVB in 2002 from Kaiserslautern. And he criticised the attitude of Dembele towards the club that helped develop him into a world-class talent.
“Dembele was given the opportunity to make a name for himself at Dortmund at the age of 19. Here, he developed into a player that Barcelona wanted to buy,” said the five-times capped Germany international.
“But instead of being grateful, he left the club, staying at home, striking and letting his team-mates down. That’s just bad style – no manners.”
Belgium international Batshuayi was taken off on a stretcher late on in the Ruhr derby, having appeared to roll his ankle.
The 24-year-old’s season could be over while there will also be concern he could miss the World Cup as Roberto Martinez’s Red Devils begin their campaign in two months’ time.
“I didn’t think it looked like the kind of injury that he would be back from quickly,” Stoger said in quotes published on Dortmund’s official website.
“I hope, of course, that I’m mistaken. I can’t yet say anything specific, other than the fact that he’s in pain and will now be examined in more detail. Hopefully it’s not as bad as it looks.”
Batshuayi has scored nine times in 14 games since joining Dortmund on loan in the winter transfer window in a deal that runs out at the end of this campaign.
For Belgium, who are in England’s World Cup group, Batshuayi appeared in half of his side’s qualifiers.
Provided by Press Association Sport