The 49-year-old Portuguese replaces Jocelyn Gourvennec who was dismissed after just one season in charge.
"Becoming the new coach of LOSC is a proud moment and a big honour for me," said Fonseca.
"I'm happy to begin this adventure and eager to get to work with the staff and the players.
"I'm extremely motivated and determined to make sure we achieve the objectives set and take the club to the highest level."
Fonseca will be tasked with revitalising a club that finished 10th last season, just a year after beating Paris Saint-Germain to the French title.
He inherits a rebuilding team, with Dutch defender Sven Botman set to join Newcastle and Portugal international Renato Sanches among several other players expected to leave.