The 48 year old Scot will begin work at The City Ground on Monday and will be in charge for home game against Bolton next week.
Chairman Fawaz Al Hasawi said: “I’m delighted to welcome Billy back to our Club and really look forward to working closely with him.
“Billy has unfinished business with The Reds and we know how hungry he is for success. In returning to The City Ground we believe his leadership will help us fulfil our ambition of making it to the Premier League.
“Billy is a Forest legend who needs no introduction to our loyal fans. We know how excited he is to pick up where he left off last time and we will back him 110%, - this is a very exciting appointment for us."
Davies won the 2007 Playoffs, finished as runners-up in 2005 with Preston North End, and reached the semi-finals in 2006 (Preston), 2010 and 2011 (both with Nottingham Forest). He also holds the record for the most Football League Championship Manager of the Month awards having won two each at Preston, Derby and Nottingham Forest.
Davies will be welcomed back together with Deputy Manager Ned Kelly, First Team Coach Julian Darby and Goalkeeping Coach Peter Williams. They will join Assistant Manager Rob Kelly and the team in driving The Reds forward to future continued success.
Davies said: “It is a privilege and an honour to be back in charge of the Reds. As my new friend Fawaz says I have unfinished business here at Forest and am relishing this great opportunity to return Forest to its former glory.
“My tenure at the City Ground was cut short last time and I can’t wait to get my boots back on and training the lads. We have a great squad and I know I can get the best from them. Coming home to The Reds is a dream come true.
Chairman Fawaz commented after contracts were signed: "We know the fans, players and staff will join us in welcoming Billy back to the Forest family. As I have said we will return Nottingham Forest to its former glory.”
Secure your seat for Billy’s homecoming when Nottingham Forest face Bolton (Saturday February 16) at The City Ground. Tickets are available for just £6 for under 12s and £25 for adults.
Tickets for Huddersfield (Tuesday February 19) are also available now at the discounted price of only £10 for adults, seniors and under 18s and £5 for under 16s.
Tickets are on sale via all the usual outlets – in-person at The Ticket Office, on-line at www.nffcretail.com or by calling 0871 226 1980 (calls are charged at 10p per minute, mobile rates may vary).