The 46-year-old was axed by David Beckham's side just five months ago, and he has already landed a new post.
Neville had been linked with taking over at New England Revolution but will soon embark on a new chapter in his managerial career.
"I am massively excited about the challenge ahead," Neville said.
"From the very first moment I met the staff I knew it was the right opportunity for me, the right club for me and the right city for me.
"The fans are the most important part of this football club with their intensity and support, and I think this journey is going to be something special."
read more on mls
Messi is the Ballon d'Or winner but is beaten to prestigious MLS award by ex-Celtic man
Messi and Ronaldo breaking attendance records but still trail League Two sides
He added: "I have great memories visiting Portland, which reminds me of Manchester, my hometown, and I can't wait for my family to get to know this beautiful city."
The former Lionesses chief, who recently held the role of assistant manager for the Canadian national team, will take the reins at the Oregon club after they ended the season 10th in the MLS Western Conference.
He replaces 52-year-old Giovanni Savarese, the former Millwall striker who was sacked after six years at the helm.
"We look forward to making Phil and his family feel at home in Portland," Timbers general manager Ned Grabavoy said.
Most read in Football
Arteta press conference, reaction to Spurs vs Chelsea chaos, Champions League build-up
Cundy bursts into talkSPORT studio to mock O'Hara following Chelsea's win at Spurs
Postecoglou gives simple five-word explanation for bold tactics in crazy defeat to Chelsea
Cole Palmer shushes Tottenham fans after penalty from Cristian Romero red card
'BECKHAM' Netflix documentary includes Gary Neville making crude joke about Spice Girls at David and Victoria Beckham's wedding
"Phil's character makes him the right person to lead this team forward as we continue to reshape the group with a goal of returning to sustained success.
"His leadership qualities, diverse experience as a coach, and ambition to evolve made him a terrific fit here with us in Portland."