The Englishman was part of Neil Lennon's management team at Parkhead but his time at the club came to an acrimonious end in June 2012.
Just weeks after helping the Hoops to the SPL title, the former Celtic midfielder was fired, claiming to be 'shocked and very disappointed' about the decision and the way it was handled by the club.
Thompson has been out of the game since his Paradise departure but has now landed a role at St Andrews and will become a key part of Blues boss Lee Clark's coaching team.
The 40-year-old, who was an academy coach at Newcastle United before he joined the Hoops, will oversee the youth set-up in the Midlands, focusing on City's Under-21 squad.
Clark's side only just managed to avoid relegation from the Championship last time out after a poor season at St Andrews.
But the Brum manager is confident the latest addition to his staff will have a big impact at the club as Thompson looks to kick-start his coaching career.
"I am delighted to have Alan on board in what was a very difficult decision with outstanding candidates," Clark said.
"His passion and desire stood out but also his knowledge of working at a club like Celtic - both as a player and a coach - where there are huge expectations.
"He has experience at all levels of coaching in senior football.
"We are delighted to welcome him to Birmingham City and to help continue the pathway for our young players to the first team."