Coyle will take immediate charge of the team, although with this weekend's clash against Sunderland postponed, his first match will be the Premier League clash with Arsenal a week on Sunday.
Coyle told the club's website: "I'm absolutely delighted to be back at Bolton Wanderers.
"I look forward to the opportunity of bringing the good times back to the club for everyone."
Bolton chairman Phil Gartside said: "Owen was our number one target and we are naturally delighted that he has returned to the football club as manager.
"He was an inspirational player who leads by example and a great motivator and, on behalf of everyone at Bolton Wanderers, I would like to say welcome home."
Coyle has a bedding-in period with Saturday's trip to Wearside off due to the ongoing bad weather.
The delay in confirming his appointment was largely due to Bolton's ongoing negotiations in thrashing out a compensation deal with Coyle's former club Burnley.
Caretaker boss Chris Evans had been preparing for Saturday's game before it was abandoned.
Earlier this week Scot Coyle made it clear to Burnley he wanted to make the move and reiterated his desire despite Burnley's reluctance to lose him.
Coyle led Burnley into the top flight for the first time in 33 years after moving from St Johnstone in November 2007, but believes Bolton is a better option.
Burnley graciously thanked Coyle for his achievements after confirming that a compensation package had been agreed with Bolton.
"The officials of Burnley Football Club would like to place on record their thanks to Owen for his services to the club and contribution to our success," read a statement on the club's website.
It's been a long, drawn-out week," Gartside admitted on Sky Sports News.
"Owen was the only one on the list. I'd got a list of 30 names but the only one we wanted was Owen. We haven't interviewed anyone, we haven't contacted anyone. It was just Owen that we wanted."
As for what makes Coyle special, Gartside added: "It's his desire. He had to come back here, really.
"He's well known to the place, he came through an era which was special to everybody, including me. Bruce Rioch revitalised Bolton in the early 90s. That three-year period was special and Owen was part of that.
"He is infectious. He still is infectious, even more so than before."
Barclays Premier League Relegation 2009/2010 Win Outright: Bolton 3/1