Warnock, who left the club after three years at the helm in 2010, replaces Tony Pulis, who departed just 48 hours before the start of the new Premier League season.
Since leaving, the 65-year-old has managed at QPR and Leeds United - guiding the former to the Premier League in 2011, before being sacked the following year.
At Elland Road, Warnock oversaw the side's worse home defeat - 7-3 to Nottingham Forest - before being sacked in April 2013.
But now he is back at Selhurst Park, despite saying in 2007 his first stint would be his last managerial role in football.
He said: “It’s a great club with great fans and it obviously didn’t quite go to plan last time which is a shame.
“I like the academy, I’ve always had a lot of time for the staff, I gave 16 academy lads their debut in the three years I was here.
“It’s a proper club and I certainly have unfinished business.”
The former Plymouth Argyle, Sheffield United and Bury manager also revealed that Palace was a job he was particularly interested in, despite having offers from elsewhere.
“I don't think I could have gone anywhere else,” he said
"I've had good offers over the past few months but even my wife is happy to be back. I love the area and its great to be able to put something back."
With transfer deadline day looming, it seems there may be some other unfinished business at Selhurst Park in the transfer market - and Warnock admitted he has an eye on a few players before the deadline.
He said: ”I hope we can get three or four finalised, probably not before the weekend. We just have to get over this next match [Newcastle United] then we have two weeks to really build."