The 36-year-old previously worked with the team on a one-off basis in February 2012, helping coaches Brian Eastick and John Peacock for the Euro 2013 qualifier against Belgium.
Neville, who has won 59 senior England caps, said: "It is a fantastic opportunity for me to work with the best young players at U21 level.
"I had a little taste of this against Belgium and it was probably the best three days I have had - it was a real eye-opener. Those three days told me that coaching is what I really want to do.
"The thing I noticed about the under-21s is that there is a great spirit amongst the staff and the players, and there is a real togetherness and determination that they want to win this tournament.
"If I can play a small part and learn from it then it will be great."
Neville added: "In tournament football you learn so much. You learn how to handle players in a different environment and how to get the best out of players.
"As a coach it is more intense during a tournament as you have got so many games to watch, videos to prepare and then you have to plan and manage your squad.
"I have been to three major tournaments as a player and to now sample it on the other side will be a great chance for me. I am looking forward to working with the best young players this country has got."
Pearce, whose team have been drawn in Group A with Italy, Norway and hosts Israel for the Euros, which take place in June, added: "Phil is treading a path towards building up his coaching credentials and has demonstrated his commitment to this by taking time out of his own summer to join us in Israel.
"For the FA it's important to encourage young coaches to take such opportunities and we're pleased that Phil will be with us during the tournament.
"Not only is it a good opportunity for Phil to learn from our environment, but it is also a chance for the young players to work with Phil. Everyone benefits from this arrangement."
Neville was at St George's Park on Tuesday, where England Under-21s were preparing for friendlies against Romania at Wycombe's Adams Park on Thursday and Austria at Brighton's Amex Stadium next Monday.
Pearce will name his 23-man squad for the Euros after the double-header of matches.
Neville's older brother and former Manchester United team-mate Gary is part of the coaching staff for the senior side, having been appointed by head coach Roy Hodgson last May.