The former Athletic Bilbao and Real Mallorca boss left Levante after failing to agree a new deal, having secured a 10th-placed finish in his first full campaign with the club.
Following confirmation on Tuesday that discussions had broken down with his former club, Caparros was announced as Granada coach a day later.
He replaces Lucas Alcaraz, who confirmed his exit from the club after they secured their La Liga survival on the final day of the campaign.
Experienced coach Caparros revealed that he was excited by the task at hand on Granada, while explaining that he would be joined by backroom staff Luciano Martin and Luis Llopis.
"It's official that I will join Granada CF for the next two seasons, with an option for a third," he wrote on his official website.
"I arrive at the club along with my trusted men, Luciano Martin and Luis Llopis. We are convinced that the project brought to us by the sports management team will help us grow step by step in the coming seasons and that our targets are increasingly ambitious.
"I feel really happy and I'm eager to meet this challenge in a special city that lives football as intensely as Granada."
