The 33-year-old becomes the youngest boss in the Football League and succeeds Paul Cox, who departed the club by mutual consent last month.
Since taking over as caretaker manager/captain, Murray has lead the side to a 1-0 win over Plymouth Argyle in his first game in caretaker charge, before overseeing a gritty 1-0 victory at Concord Rangers in the FA Cup.
His first game as permanent manager will be tomorrow’s FA Cup second round tie away to Cambridge United.
Speaking of his appointment, the former Derby player said: "After much thought and consideration, I feel the time is right for me to take this step into management."
"I'm excited about this challenge and new adventure and I believe I have the knowledge, ability and contacts throughout the game to be successful."
He added: "This is the proudest day of my career to date."
Murray has made over 500 appearances during his 17-year playing career and winning promotion no fewer than five times.
He made his start at Derby and played for them in the Premier League before their relegation.
He has had two previous spells at Mansfield as a player, firstly as a loanee whilst at Derby, and then for a season in 2004/5.
He returned to One Call Stadium for a third time in September 2010, and was assistant manager/player for the last couple of seasons before making his move to full time manager.