The initial contract is for eight years with an automatic one-year extension if Panathinaikos win the title.
Munoz - who is the fifth coach in just over two years - takes over from Swede Hans Backe following his sacking after only four games in charge.
The 49-year-old Spaniard played for Barcelona, Sampdoria and St Mirrien and won more than 60 caps for Spain. He has since coached both Villareal and Zaragoza.
Salva: "three clubs want me"
Panathinaikos also signed an agreement with Athens mayor Theodoros Behrakis for a new ground in Votanikos area.
"I think today marks the end of Panathinaikos' travels through greater Athens," said the club's majority shareholders Yiannis Vardinoyiannis.
"It signals a new beginning."
Group G: Stalemate all round
Group G round-up: Hapoel pick up first point