The 53-year-old started his managerial career at Oakwell 19 years ago but left in 1998 following their relegation from the Premier League.
Wilson has since managed six other clubs in the Football League, and arrives at the Championship club to replace David Flitcroft who was sacked in November.
He finds Barnsley bottom of the table after 20 matches, however they are only three points from safety and Wilson is confident they can turn their fortunes around.
"It's a little surreal at the moment but very exciting," he said after being unveiled on Tuesday. "I'm really looking forward to it.
"You don't often envisage coming back to a place of work where you've enjoyed so much time, fortunately from my point of view it's happened and it's fantastic.
"It (the club) has changed a lot, the facility is first class which wasn't the case when we were here last.
"It's a terrific challenge, it will be a tough one, we've got some very tough games coming up but what I've seen of the players and the game's we've watched we have got the quality to stay up."
Wilson – who will be assisted by Micky Mellon – will take charge of his first game on Saturday as they visit Elland Road to face Yorkshire rivals Leeds United.
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