The 53-year-old takes over from David Flitcroft, who was relieved of his duties in November with the club languishing at the bottom of the Sky Bet Championship table.
Wilson led the Tykes to promotion to the top division for the first time in their history in 1997 but his stay came to an end after they were relegated straight back to the Championship, and he joined Sheffield Wednesday soon afterwards.
Since then, Wilson has spent time in charge of Bristol City, the MK Dons, Hartlepool, Swindon Town and Sheffield United - he was fired by the Blades in April.
Wilson's first game in charge will be Saturday's Yorkshire derby against Leeds at Elland Road.
He told Sky Sports News: "It's a bit surreal but fantastic to be back. It's very exciting and I am very privieged to be asked to come back.
"It's changed a great deal. The memories we've had before are what they are but football has moved on and the challenge now is to keep the club in the Championship.
"It's a tough challenge, but a great challenge.
"In recent weeks, the performances have been very good. Micky Mellon, who took over from David Flitcroft, is very well-respected throughout the game and he's picked the reins up very well. He's got a couple of good results to give the belief back to the players and the fans.
"We're not cut adrift at the bottom and you can throw a blanket over quite a lot of teams in that area, swapping and changing places on a regular basis. We've got to believe we can get out of it, and I think we are capable of doing it."