Chairman Darragh MacAnthony unveiled the son of Manchester United boss Sir Alex Ferguson at the club's London Road ground, replacing Gary Johnson at the helm.
Johnson was sacked earlier this week after disagreements with MacAnthony.
Shock return: Darren Ferguson has been reappointed as Peterborough manager
But 38-year-old Ferguson has put pen to paper on a four-and-a-half year deal with MacAnthony bringing back one of the most successful managers in the club's history, after he guided them from back-to-back promotions in 2008 and 2009.
Ferguson, who lost his job as manager of Championship strugglers Preston earlier this month, said: 'It was an easy decision for me to return.
'Contrary to what some people may say, me and the chairman have always had a great relationship and this is a really good football club.
'There have been a lot of changes but we can get this club back on track.
'There was no falling-out. Toward the end of my time here I maybe got a bit complacent. It was easy to get carried away with the success we had.
'We both agree we have learned a lot. We were naive going into the Championship last time but we will learn from that.
'It has to be positive from now on. We've had a 15-month break but let's get back on with it.'
Ferguson is confident of an immediate return to the Championship.
He said: 'You'd have to say automatic promotion is still possible this season. Anyone who can go on a run has got a right chance.
'I know the saying is 'never go back' but I don't believe in that.
'I've missed the place. I've had a hard 12 months at Preston but it's good to be back.
'We want to get into the Championship and stabilise in the Championship. That has always been the aim.'
Back on old ground: Ferguson said he was pleased to return to London Road
The chairman said: 'I asked him to come to the game last night and he has signed for four-and-a-half years. Let's make the magic happen again.
'I haven't enjoyed owning the football club over the last 18 months or so and I hope this can change that.
'We have both realised that the grass isn't always greener.'
MacAnthony had also claimed that Ferguson had taken members of the Posh squad drinking and unsettled them with offers to join him at Preston.
But he too hopes to crown a fresh start with another promotion.
He said: 'I came out with some silly things last time which I regret but we have always had a lot of respect for each other.
'I gave him his first shot as a manager and he gave me back-to-back promotions.
'We started a project together and we can now finish it together.
'It's been a rocky 15 months since Darren departed. Our hardcore fans will be delighted that Darren is back.'
MacAnthony hopes Ferguson can restore stability at the club.
Ferguson will now look to lead Posh to promotion for a third time after watching his side move back into the play-off places with a 2-1 win over Brentford on Tuesday night.
Axed Preston boss Ferguson starts talks over shock Peterborough returnJohnson leaves Peterborough after fall-out with chairman MacAnthonyThe 2010/11 managerial merry-go-round: Gary Johnson leaves Peterborough by mutual consent
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