Greek media reported Benitez had signed a two-year contract with the Athens-based club. Benitez was most recently at Celta Vigo, where he was dismissed in March last year after eight months in charge.
The deal includes an option to extend for an additional year and is worth around four million euros (£3.5m) per season, which local media reported was the highest salary ever paid to a coach in the Greek top flight.
Benitez guided Liverpool to the 2005 Champions League title and led Chelsea to the 2013 Europa League crown, in addition to domestic and European successes with Valencia, Inter Milan and Napoli.
The Spaniard will be tasked with reviving Panathinaikos' fortunes, as the 20-time Greek champions sit seventh in the Greek Super League and have made an inconsistent start to their Europa League campaign, suffering back-to-back defeats after an opening win.