The former Hereford manager left his role with the Robins just four months on from joining up with them and his arrival at the Bescot Stadium will prompt a third stint working with Saddlers boss Dean Smith.
The 56-year-old, who scored 56 goals in 204 appearances while playing for the midlands club during the 1980s, confirmed his decision to rejoin Walsall was the right one.
"It feels good to be back," O'Kelly told the official club website.
"I've built up an excellent working relationship with Dean Smith during my previous spells here and hopefully we can continue where we left off.
"I want to play my part in helping us to continue to build upon the foundations that have been laid here. It's a long-term project and we're building all of the time."
The return of O'Kelly fills a void left in Smith's coaching staff after the club failed to replace David Kelly who left to join Nottingham Forest in February, just two weeks after joining up with the Saddlers.
The returning coach was already in buoyant mood ahead of the new season and voiced his eagerness to experience some of the potential fixtures that lie ahead.
"The day when the fixtures for the new season are released is always exciting," he said.
"There really are some mouth-watering matches to look forward to and some interesting local derbies with the likes of Wolves and Port Vale joining us in League One."