Hodgson, 75, replaces Patrick Vieira who left Palace on Friday following a run of 12 games without a win that left the club three points above the relegation zone.
Palace are the only side in the league without a win in 2023, having drawn five and lost seven of their games. Their last league victory came on Dec. 31, 2-0 at Bournemouth, and they are 12th on 27 points with 10 games to play.
"It is a privilege to be asked to return to the club, which has always meant so much to me, and to be given the important task of turning the team's fortunes around," Hodgson said in a statement. "Our sole objective now is to start winning matches, and to get the points necessary to ensure our Premier League status.
"Crystal Palace is known for its fighting spirit, and I have no doubt that all our supporters will fight with us, beginning with the visit of Leicester City a week Saturday."
Paddy McCarthy, who oversaw the 4-1 Premier League defeat against Arsenal on Sunday, will be Hodgson's assistant with Ray Lewington returning as first-team coach.
"I would like to welcome Roy and Ray back to the club," Palace chairman Steve Parish said. "We are obviously in a very challenging period but we believe that Roy's and Ray's experience, knowledge of the club and players, alongside Paddy can help fulfil the immediate requirement of keeping us in the league."
Hodgson came out of retirement in the 2021-22 season to take charge of relegation-threatened Watford on a short-term deal but failed to lead them to safety.