He has managerial experience in the English leagues with Coventry and Sunderland, as well as Raith Rovers and Motherwell north of Hadrian's Wall.
He also had a short stint in charge of Australian A-League side Sydney FC, and will arrive in London in May.
The Bees have been relegated to League Two after an abysmal season, and Butcher will be expected to spearhead a promotion push.
"We were particularly impressed by his four-year record at Motherwell where under his leadership and guidance the club competed well above expectations," said Brentford chairman Greg Dyke.
"With that experience under his belt we believe that Terry is the right person to lead the Brentford fightback."