The 45-year-old, who led Boro into npower League One with back-to-back promotions, succeeds Gary Smith as manager after the former Colorado Rapids boss was relieved of his duties last week following a poor run of form.
Westley opted to leave Broadhall Way in January last year in an attempt to further his career at Preston, but his 13-month stay at Deepdale ended when he was sacked with North End sitting just five points above the relegation zone.
Stevenage, 10 points above the League One drop zone in 15th place, host bottom-placed Hartlepool on Monday looking for a first win in four outings.
Chairman Phil Wallace said: "Graham was keen to come back to Stevenage and, although I met some strong candidates, without doubt I think he's the best man for the job right now. The club enjoyed a great deal of success before he left last year and we moved forwards significantly in his time here on several levels.
"Since he left we've continued that progress in people and infrastructure off the pitch. So we spent a lot of time this past week talking about things we feel we could do better this time round and we've put many of those into our contractual arrangement.
"There are a lot of myths about Graham and the 9-5 one is the biggest. Yes, he demands a high work ethic and commitment from his players but the extra hour or two some may do is spent on personal development subjects. As long as a lad wants to improve himself and win medals that's never been an issue at our club.
"I'm looking forward to some exciting times again! This is the first time our season has ended in April for four years and that's a measure of how far we've come and what we're about."