Sacked in March by Bundesliga side Schalke 04, Rutten will take over from caretaker manager Dwight Lodeweges, who replaced Huub Stevens following his resignation in January.
Rutten previously held various posts at Eindhoven between 2001 and 2006 before joining Twente Enschede.
With Twente, Rutten qualified for the Champions League preliminary round last season and then moved to Schalke but was sacked after disappointing results.
"It feels good to return at the club where I already worked for five years and we really achieved something in that period" Rutten was quoted as saying on PSV's website.
As assistant to Guus Hiddink, Rutten helped PSV to a league and cup double in 2005 and the Champions League semi-finals. PSV retained the league title in 2006.
This season PSV have struggled and after four successive championships they are fifth in the table, 21 points behind leaders AZ Alkmaar, who could secure the title on Saturday, and three points away from a UEFA Cup spot.
