Palace have been searching for a new manager since the shock departure of Tony Pulis on the eve of the new Premier League campaign.
A string of names were linked with the vacant role, including Malky Mackay, Tim Sherwood and Steve Clarke, but the Eagles have opted for former boss Warnock, who previously worked at the club from 2007-10.
"Crystal Palace are delighted to announce that Neil Warnock has been appointed as the club's new first team manager with immediate effect," read a statement on the club's official website.
Palace currently lie in the Premier League drop-zone after successive defeats and Warnock will be in the dugout for Saturday's trip to Newcastle.
The 65-year-old has been without a managerial job since leaving Leeds last April, but has been offered a third chance to take charge of a Premier League club.
Warnock endured relegation agony with Sheffield United on the final day of the season in 2007, while he was axed as manager of QPR in January 2012, with the club sitting above the drop-zone.
He steered Palace to the Championship play-offs in his previous spell, but left when the club slipped into administration.
Warnock returns with the club in another state of turmoil as the south Londoners attempt to rebuild after the sudden end of the Pulis era.