Appleton, guided Oxford to automatic promotion from League Two and two Wembley finals in the Football League Trophy in his three years at the club.
The 41-year-old previously worked with Shakespeare at West Brom.
"Michael has already achieved great success and been acknowledged by many as one of the most talented coaches in English football," Shakespeare said.
Former Portsmouth, Blackpool and Blackburn boss Appleton added: "The opportunity to move to a Premier League club was something I felt that I couldn't turn down, which I hope fans will appreciate."
Shakespeare was confirmed as the Foxes' permanent manager on a three-year deal earlier this month.
He had taken temporary charge at the King Power Stadium in February following Claudio Ranieri's sacking.
Shakespeare is also looking for another first-team coach, with former defender Chris Powell a contender.
Oxford United manager Michael Appleton has joined Leicester City as Craig Shakespeare's assistant.