The 52-year-old, who counts QPR, Aldershot and Wycombe Wanderers among his former clubs, leaves his position on the coaching team at the MK Dons to take the reins at the Kassam Stadium.
He succeeds previous incumbent Chris Wilder, who left promotion-chasing United to join struggling Northampton Town in January.
Speaking to the club's official website, Waddock said: "I am grateful to Oxford United for having given me this great opportunity, and cannot wait to get started.
"The club is in a good position, and the immediate priority is to turn that position into promotion at the end of the season.
"In the medium term, the board's vision is to build on the solid platform that has been put together to take Oxford back up the leagues, where a club of this size belongs.
"I applied for this job because I believe that I can be a part of achieving that ambition, and because I fully buy into the board's philosophy of how a football club should be run."
Waddock's first game in charge will be Monday's visit to Southend United, with caretaker boss Mickey Lewis having overseen Friday's 1-0 win over Hartlepool United.
