The former Hoops and Scotland midfielder, who made 229 appearances for Celtic from 1990 to 1996, was appointed by new boss Ronny Deila, who took over the post earlier in the month following the departure of Neil Lennon.
"It is a huge honour for me to return to Celtic, the club which has always been such a major part of my life," Collins told the club's official website.
"I am grateful to Ronny for giving me this wonderful opportunity and I look forward to working closely with him and the players to ensure that we can continue to bring the good times to Celtic.
"I know what a great club Celtic is and I know exactly what the club means to our fans.
"I will support the manager in every way and I am sure that together with our players, the backroom staff and the fans, we can all play our part in bringing success to the club."
Collins, 46, started his career at Hibernian and also played for Monaco, Everton and Fulham and was capped 58 times by Scotland.
He won the League Cup in 2007 as Hibs manager and had a spell as boss of Charleroi in Belgium and as director of football at Livingston.
A delighted Deila said: "I have had a number of meetings with John, I can see what the club means to him and I can see the qualities that he will bring to Celtic.
"He is a first-class coach and has ideas on football which are very similar to mine so I am sure he will be a great addition to my team.
"He will start immediately and together we will now prepare for this first day of training next week.
"We have important matches in the near future so I am pleased that I have been able to secure him so quickly. Now we can get to work."