The 35-year-old experienced a brief spell as player-manager with Swiss club Sion during the 2012-13 season but, after falling out with president Christian Constantin in May, he was demoted to the reserves to serve out his contract while being replaced as manager by Michel Decastel.
Palermo president Maurizio Zamparini, who changed his team's head coach four times during the Sicilians' relegation season, last month admitted opening talks with Gattuso while working on a contract resolution with then-Rosanero boss Giuseppe Sannino.
A statement published on palermocalcio.it today read: "Palermo have entrusted Gennaro Ivan Gattuso with the care of the Rosanero first team.
"The Corigliano Calabro-born coach, who has signed a one-year contract with the option of a two-year renewal, will be presented at 12.30pm on Friday at the Stadio Renzo Barbera."
Gattuso, who played a season with Scottish giants Rangers in the late 1990s, formed part of Italy's World Cup-winning squad in 2006 and won two Serie A titles, two Champions League trophies and a FIFA World Club Cup with Milan.
Sannino, meanwhile, is expected to take the reins at top-flight club Chievo after finalising his departure from Palermo.