Taylor took control at the Sky Bet League One club on an interim basis almost a month ago to the day following Martin Allen's sacking.
He had won two and lost two of his four league games prior to Saturday's 1-1 draw at home to non-league Brackley in the first round of the FA Cup.
And chairman Paul Scally has seen enough to call off his search and appoint Taylor on a full-time basis until May at least.
Scally told Gillingham's official website: "The players and I are delighted that Peter has agreed to stay on at the club and we wish him every success in his ongoing efforts to push the team up the table."
The Gills are currently 18th in League One, two points above the drop zone, having taken six points from Taylor's four games at the helm.
It is one place lower than when Allen was dismissed in mid-October, although he had claimed just nine points from the club's opening 11 games, coming after he led the Kent outfit to the League Two title last season.
Taylor, who guided the Gills to promotion himself during one season at Priestfield in 1999/00, most recently took short-term charge of England's Under-20 side during what was a failed World Cup tournament in Turkey earlier this summer.
Taylor famously enjoyed a one-match caretaker spell in charge of England's senior side against Italy in November 2000 for which he handed David Beckham the captain's armband for the first time.
The 60-year-old has also twice managed England's Under-21 team as well as the likes of Leicester, Brighton, Hull and Crystal Palace at club level, while he also led Bahrain's national team between July 2011 and October 2012.
- Sports & Recreation
- Paul Scally
- Martin Allen