The former Valencia and Atletico Madrid striker resigned as boss of Litex's rivals CSKA Sofia in January after failing to offer a guarantee that he could take the club to the title.
"It wasn't a difficult decision," said Penev, who signed a one-year contract. "I know Litex are a well-organised club who aim high. But I'm always chasing the first place too."
"I know we'll have to work hard from now on but I'm sure we'll achieve good results."
The 44-year-old comes in for Angel Chervenkov, who was sacked following an early Champions League's exit last month and replaced on a caretaker basis by Petko Petkov.
Penev's debut as Litex coach will be an emotional return to CSKA on September 11.
"I don't have to look back now," he said. "I parted with CSKA and now I only look forward."
Penev scored more than 150 goals in the Spanish first division and is adored by the majority of CSKA fans for netting 88 goals in 123 matches for the 31-times Bulgarian champions during his playing career.
The nephew of former Bulgaria coach Dimitar Penev will be assisted by former international midfielder Radoslav Zdravkov.
Litex, who won their first title since 1999 last season, are fourth in the league standings on 11 points from five matches, two points behind leaders Chernomorets Burgas.
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