Bradford are 16th in League Two, 13 points above the bottom two and 12 off the play-off spots, having won only one of their six league games this year.
Taylor began his managerial career at Southend and has also had spells in charge of Gillingham, Leicester City, Brighton, Hull, Crystal Palace and Wycombe, who he left in October 2009.
Bantams joint-chairman Mark Lawn told BBC Radio Leeds: "There were some excellent people on the list but Peter was the best interviewed and the one we're really looking for.
"We're looking for someone who has been there and done it at this level, and Peter has done it with at least two clubs.
"His coaching credentials with the England Under-21s make him stand out as a good signing.
"We've done it until the end of the season so we can both look at each other really.
"People say Bradford is a sleeping giant - it's a phrase that's used often, but I think we really are."
Taylor hopes his stay at Valley Parade is a long one, telling the Yorkshire Post: "I remember what happened at Hull when I went in there (in 2002) with the club sitting 18th in the bottom division.
"We went on to enjoy a lot of success and I see similar potential here at Bradford. Certainly if we can go on a run then there is a potential of putting bums on seats.
"I still believe we can do something this year. But if that does not prove to be the case, then definitely next year.
"The potential here is huge and I want to tap into that. It is why I am looking well beyond this season.
"I agreed with the two chairmen at my interview that an appointment until the end of the season made sense.
"But I am hoping that both chairmen and myself will be looking much longer term than that."
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