Stotts replaces interim coach Kaleb Canales who finished off the season for the Blazers once seventh-year coach Nate McMillan was fired in March.
"Terry is one of the elite offensive minds in the NBA, has extensive experience with multiple organizations and was instrumental in the Dallas Mavericks winning the 2011 NBA Championship," Blazers general manager Neil Olshey.
The 54-year-old Stotts, who served as an assistant coach for the Dallas Mavericks from 2008-2012, has also had two separate tenures as a head coach with Atlanta (2002-2004) and Milwaukee (2005-07).
"I'm very pleased to be a part of a great franchise in a beautiful city with such a proud history," Stotts told the Blazers website.
"“I look forward to working hard with Neil and our players toward the ultimate goal of bringing another championship to Portland."
Portland have been unable to climb out of the NBA's middle of the pack in recent years as luck has not been on their side.
Greg Oden, their No. 1 overall pick in the 2007 draft, barely saw the court during his injury-plagued stint while former NBA All Star Brandon Roy also had his Portland tenure derailed by injury.
The Blazers missed the play-offs this past season for the first time in four years, ending a string of three straight first-round exits.