"Neil has agreed a two-year deal and will lead the team this Saturday in our Premier League game at Newcastle United," Palace said on their website (www.cpfc.co.uk).
His appointment ends an eventful search in which several different contenders had at various times been regarded as favourites for the job.
Malky Mackay, formerly manager of Cardiff City, was on the verge of being appointed until a scandal over text messages - which the League Managers Association described as "disrespectful of other cultures" - sent between him and the club's sporting director Iain Moody, who then resigned.
The ex-Tottenham Hotspur managers Tim Sherwood and Glenn Hoddle both withdrew their interest.
Warnock had left the south London club in 2010 after they went into administration while in the Championship (second tier), moving across the capital to join Queens Park Rangers.
"It has been one of the most difficult decisions of my career, and there's been a few," he wrote in his newspaper column at the time.
"The reason I am sad, as well as excited, is that of all the clubs I have been at the fans at Crystal Palace have been the best.
"I owe a lot to Palace. They have rekindled my enthusiasm for management. If it was not for (then chairman) Simon Jordan there is no way I would have come to London."
Palace, having been deducted 10 points because of administration, just avoided relegation at the end of that season.
Warnock took QPR into the Premier League in 2011 before being sacked eight months later.
The following month he was appointed manager of Leeds United, only to be dismissed just over a year later.
"We've got a lovely house in Cornwall and I love living there, so I think it's important to have your priorities," he said at the time.
"I still want to get involved and I think there's a space for someone between the board and the manager who's not a threat, but I only want to do a couple of days a week - and in commuting distance from Cornwall."
Now, however, he is back for the long haul, with the immediate aim of securing Palace's top flight status.
In all Warnock has managed 13 clubs, starting in non-League circles almost 35 years ago, and won promotion seven times.
When finally reaching the Premier League with his home-town club Sheffield United and then QPR, he was unable to establish either of them in the top flight, which will now be the aim.
Palace have lost their opening two league games since Tony Pulis, who steered them to an 11th-place finish against the odds last season, left two days before the start of the campaign.
Warnock has a reputation as a combustible character, especially on the touchline. He has been involved in numerous controversies in his long career, and one of his first tasks will be to make peace with winger Jason Puncheon following a contretemps between the two earlier this year.
In a radio interview Warnock said he would not have trusted Puncheon to take a penalty that the Palace player missed badly in a defeat by Spurs.
Puncheon responded with a series of abusive remarks and accusations on Twitter, for which he was later fined 15,000 pounds ($24,900) by the FA.
Former England striker Gary Lineker, now a broadcaster, tweeted on Wednesday: "Good luck to Crystal Palace. Good luck to Neil Warnock. Good luck to Jason Puncheon."
($1 = 0.6030 British Pounds)