Fernandez, 50, will take up his position on May 1 and will start off by leading Israel in away friendlies against Chile and Uruguay at the end of that month.
"We are very happy that Fernandez will be the Israel national team coach, I think he is the best choice from among the coaches we could have picked," Luzon said.
Fernandez played 60 times for France and was a member of their Euro 1984 winning squad alongside Michel Platini. After retiring as a player he coached Paris St Germain and Athletic Bilbao.
He coached Beitar Jerusalem in Israel for one season in 2005-06 but resigned after citing a crisis of confidence with the team's management.
Fernandez will have the tough task of piloting Israel through a Euro 2012 qualifying group that contains Croatia, Greece, Latvia, Georgia and Malta.
"There are many things to do, there is an objective, which is to qualify the Israeli team for the European Championship and I wish deeply to achieve this objective," Fernandez said.
Luzon has been criticised in the Israeli media for insisting on naming a foreign coach and that Israeli soccer was not good enough for a foreigner to make a significant difference.
But Luzon argued that Spanish-born Fernandez, whom media reports say will not cost more than hiring a local, was a man who knew the Israeli game well and would settle in fast.
"He understands the mentality of Israeli soccer and nobody will be able to say that he does not know the Israeli game ... I believe in him and I'm sure we will all smile on our way to the Euro finals," Luzon said.
Since entering the European fray in 1992, Israel have appointed only one foreign coach, Dane Richard Moller Nielsen who was at the helm between 2000-2002.
Although offered a contract extension Nielsen refused and was succeeded by Avram Grant.
Israel have reached a major competition finals only once, in 1970 when they played in the World Cup finals in Mexico.
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