West Ham will be announcing their new manager on Tuesday.
The 64-year-old Manuel was former Manchester City and Real Madrid manager.Before joining West Ham he was with Hebei China Fortune.
His new job will see him come back to the Premier League.
He succeeds David Moyes, who was released at the end of his contract after guiding the Hammers to a 13th place finish.
Chilean Pellegrini will be joined at London Stadium by assistant Ruben Cousillas.
West Ham had explored the possibility of hiring Newcastle United manager Rafael Benitez but quickly concluded it would be hugely difficult for the Spaniard to leave St James’ Park.
Pellegrini, has agreed to take lower pay but it is speculated he will be the highest paid manager in West Ham history.
Chairman David Sullivan had previously said he intended to hire someone who had experience at the highest level.
Pellegrini, who won the 2013-14 Premier League title and two EFL Cups during his three years at Manchester City, in addition to qualifying the club for the Champions League semi-finals for the only time in their history, can bring some stability to West Ham.
The club have experienced huge problems during their first two seasons after leaving their legendary home at Upton Park.