The 62-year-old was sacked as manager in May 2012 but insists he had "no hesitation" over returning after talks with the owners and Brendan Rodgers
The 62-year-old, who was sacked as manager in May 2012 following an eighth-placed Premier League finish, will take up the post with immediate effect following discussions with the club's American owners, Fenway Sports Group, and Brendan Rodgers.
Liverpool claim the club will benefit from the appointment "not just from the Anfield legend's decades of experience, but also his close affinity with supporters".
Dalglish said: "It is an honour and privilege to be asked to return to Liverpool as a director of the club.
"I have always said if there is anything I could do to help this club I would make myself available - when the call came I had no hesitation.
"I am looking forward to working with the board of directors and contributing to the strategic issues that affect Liverpool.
"Liverpool has given me and my family so much since we came here just over 36 years ago and my priority is and will always be to have the club's best interests at heart."
As a player, Dalglish made 515 appearances for Liverpool before guiding the club to three First Division titles during his six-year reign as manager. The Scot returned to Anfield as a caretaker boss in January 2011 and was offered a three-year deal the following May.
Despite winning the Capital One Cup during his second stint as manager, Dalglish was criticised for the manner in which he handled the Luis Suarez racism incident involving Patrice Evra, which subsequently saw the Uruguayan banned for eight games.
"We are delighted Kenny has accepted our offer to join Liverpool as a non-executive board director and we are sure he will make a valuable contribution to the club’s strategy," said Liverpool's principal owner John W Henry.
"Kenny has a unique relationship with our supporters and embodies everything that is special about Liverpool. We are thrilled that the club will benefit from his experience and passion for the club and our supporters.
'Kenny has a unique insight on the values and traditions that helped to make Liverpool one of the greatest sporting institutions, not just in football, but in world sport. We are proud and honoured to have him back at the club he has represented with such distinction."
Rodgers, whose side currently sit second in the Premier League after six games, admits he was impressed by Dalglish's desire to see turn Liverpool into title challengers.
"When I met with Kenny to discuss this appointment, I was struck by the passion and drive he still has in wanting to see Liverpool return to where it should be; one of the most successful clubs in the world," said Rodgers.
"We are all together in that goal - owners and supporters, players and management and also icons such as Kenny Dalglish. I want people around us who have this club and what it stands for in their heart."