Balakov said he could drag the club off the bottom of the table even though they have gone 16 games without a victory in the Bundesliga.
"I accepted the offer because I believe we can avoid relegation," the 45-year-old told reporters after quitting Hajduk Split of Croatia.
"This is a long-term project to bring the club to a healthy position where it can be a solid part of the Bundesliga."
Balakov, who played for VfB Stuttgart from 1995-2003 and was briefly their player-manager, was a member of the Bulgaria team that finished fourth at the 1994 World Cup.
He joined Hajduk last May.
Kaiserslautern are five points adrift of Freiburg who are in the relegation play-off spot.