"With Robin Dutt, we have hired the candidate we hoped for to the coach's position and we're convinced we'll embark on a new beginning with him, which will deliver success," said club director Thomas Eichin.
Dutt said he was delighted to be back coaching again having left Leverkusen in 2012.
"I'm really delighted to be back on the bench," said Dutt.
"Werder Bremen is a great club and constitutes for me a really passionate challenge which I hope to tackle with enthusiasm."
Schaaf had been in charge of Werder since 1999, making him the longest serving coach in Bundesliga history.
He led Bremen to a league and cup double in 2004 and won two more German Cups in 1999 and 2009.
However his last season in charge was a big disappointment as he only just managed to steer the club clear of relegation.