The Yorkshire side sakced Gary McAllister after Saturday's 3-1 defeat at MK Dons, their fifth successive loss.
Grayson has been in charge at Blackpool for the last three years and guided the Seasiders to promotion to the Championship via the play-offs in May 2007.
The 39-year-old enjoyed a 17-year playing career that saw him make over 500 first-team appearances after starting out at Elland Road as an apprentice.
He also played for Leicester City, Aston Villa and Blackburn Rovers before joining Blackpool six years ago.
After a successful spell as player-caretaker manager he was handed the managerial job on a permanent basis in the summer of 2006.