The experienced Dutch coach, 69, succeeds Jose Mourinho, who was sacked on Thursday, and returns to a role he previously performed in 2009, when he led Chelsea to glory in the FA Cup.
"I am excited to return to Stamford Bridge," Hiddink said in a statement on the Chelsea website.
"Chelsea is one of the biggest clubs in the world, but is not where it should be at the moment. However, I am sure we can all turn this season around.
Chelsea said Hiddink would attend their game against Sunderland on Saturday, but that first-team coach Steve Holland would take charge of the team.
Mourinho, Chelsea's most successful manager, was sacked by the west Londoners for the second time after a run of nine defeats in 16 games saw the champions slump to within a point of the Premier League relegation zone.
Chelsea owner Roman Abramovich previously turned to Hiddink in February 2009 after sacking Luiz Felipe Scolari.
"The owner and the board welcome back a coach with a wealth of top-level experience and success, including his previous spell with the club in 2009 when we lifted the FA Cup," Chelsea said in a statement.
"Mr Abramovich and the board believe that Guus has what it takes to get the best out of our talented squad.
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