Birmingham's new assistant manager, the former England defender Mick Mills, said of Horne: "He is another leader, another player with vast experience who likes to win games."
Horne, who won his 54th cap for his country in the 5-0 victory against San Marino at the weekend, said: "Birmingham City are a sleeping giant. The management are ambitious and so am I. It's a big challenge."
Horne began his career with Wrexham and had spells with Portsmouth and Southampton before joining Everton in 1992.