Scolari has endured three miserable weeks after his Brazil side crashed to an unprecedented 7-1 defeat by Germany in front of a home crowd in Belo Horizonte in their World Cup semi-final.
The 65-year-old was officially fired by Brazil on July 14, one day after the World Cup ended and two days after his side suffered another embarrassing result, a 3-0 loss to Netherlands in the third-place match.
"I've been here twice before and always had a marvellous relationship," Scolari told a news conference as he was officially presented at the Porto Alegre club.
"I came back at this moment because I need a hug, some affection, people who know me and Gremio is the right place, because I know that the players and the supporters will be with me.
"Everyone knows that I'm a Gremio fan," added Scolari, who was greeted by more than one hundred fans as he arrived at Porto Alegre airport. "The only invitation that I would accept is from Gremio.
"I'm at home and happy to be at Gremio again. There's nothing better than being here today."
Scolari had a brief spell at Gremio in 1987, then returned in 1993, making his name in the subsequent four years.
He turned Gremio into one of the most feared and ruthless teams in South America, winning the Copa Brasil in 1994, Libertadores Cup in 1995 and the Brazilian championship the following year.
Gremio have appointed 24 different coaches since Scolari left the club at the end of 1996, including Celso Roth, who has had three stints in charge, and Renato Portaluppi, who has coached them twice.
Scolari replaces Enderson Moreira who was fired on Sunday after his side lost at home to Coritiba in the Brazilian championship.
Gremio are 10th in the 20-team table with 19 points from 12 games.