ESPN reported that the 43-year-old had resumed talks with the club after initially rejecting an offer to join them last month.
Sources told ESPN that Gerrard was again open to a move to Saudi Arabia after further discussions with the club hierarchy.
"Where legends are found. We're thrilled to announce Steven Gerrard is our new head coach," Al-Ettifaq wrote on Twitter.
"He's no stranger to silverware. A Legend who brings a glorious history and exciting future to Ettifaq," the Saudi team added.
Club president Khalid Al-Dabal expressed his happiness after Gerrard signed a two-year deal.
Al-Dabal described the deal as one of the most famous and influential at the level of the Saudi Pro League.
Al Ettifaq had been without a permanent manager since French coach Patrice Carteron left his position at the club in February. But they have identified Gerrard as their favoured option to rebuild the team after finishing seventh in the 16-team Pro League last season -- 35 points behind eventual champions Al Ittihad, who have since added Real Madrid forward Karim Benzema to their squad.
Gerrard, who guided Rangers to their first Scottish title in 10 years in 2021, has been linked with the managerial vacancies at Leicester City and Leeds United -- both relegated from the Premier League last season -- in recent weeks. But he missed out on the Leicester job to Enzo Maresca, and sources told ESPN that Leeds are expected to hire former Norwich coach Daniel Farke.
Information from Reuters was included in this report.