Wolves have recalled defender Kortney Hause from his loan spell at League One club Gillingham.
The 48-year-old joined the Gulls in February as a temporary replacement for Martin Ling, who was on sick leave as he recovered from a stress-related illness.
Knill helped steer the club to npower League Two safety and, after Ling's departure was confirmed at the end of the campaign, the former Scunthorpe boss was offered the job on a permanent basis.
Chairwoman Thea Bristow told the club's official website: "I am absolutely thrilled to welcome Alan Knill as the new manager of our club.
"Alan was obviously the number one candidate for the job and I would like to personally thank him for his efforts last season.
"We welcome him to the permanent position of Torquay United manager and look forward to happy times ahead."