Forest sacked Pearce - who only took the reins in the close-season - on Sunday after a run of just three wins in 17 Championship games, taking the club from the top of the league to 12th in the table.
Pearce has subsequently been offered a different role at the City Ground with Freedman taking over in the dugout.
Freedman, who enjoyed a two-year playing spell at Forest between 1998 and 2000, has been out of work since being leaving Bolton Wanderers last October.
The 40-year-old started his managerial career at Crystal Palace, moving to Bolton in October 2012.
Forest chairman Fawaz Al Hasawi released a statement thanking club legend Peace for his efforts, but stated the decision to remove the former England captain - who played for Forest for 12 years - was the best decision for the club.
"I would like to place on record my gratitude to Stuart Pearce for all his endeavours during his time as manager of Nottingham Forest," read Al Hasawi's statement on the club's official website.
"My decision to relieve Stuart of his duties is the hardest footballing decision I have ever made.
"I came to that decision after a long conversation with Stuart about the best next step for the club. Unfortunately, recent results convinced me it was best to pursue alternative managerial options. I hope our supporters understand my decision.
"Stuart is someone I have always admired and that will never change. For that reason I have offered him an advisory role at the club, which I sincerely hope he accepts so we can all move forward together."
