The 55-year-old replaces former coach Steve Cotterill at the City Ground after only two months at the helm of Crawley Town, with a compensation package agreed
O'Driscoll only took charge of Crawley Town in May, but rejoins Forest after a five-month stint as a first-team coach at the club last season.
"We interviewed many well-known and high profile figures but none of them impressed us as much as Sean O'Driscoll," Forest's majority shareholder Fawaz Al Hasawi told the club's official website.
"Sean's passion for Nottingham Forest, knowledge of the game and the Championship in particular, plus his work ethic, shone through in our conversations.
"He is hugely respected, not only by members of our current squad and staff at the club for his work in helping transform our fortunes last season, but also within the wider football community.
"We are delighted to welcome Sean back to the club. He has our total support and we are looking forward to a long and successful relationship."
O'Driscoll leaves Crawley Town before taking charge of a single match and the club have revealed that a compensation package has already been agreed, which will include a friendly within the next two years at Nottingham Forest.
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"The club is extremely disappointed to be losing Sean so soon," Alan Williams, Crawley Town's chief executive, stated on the club's official website.
"But our policy has never been to stand in the way of any employee who feels they would prefer to pursue a role at a different club, and following lengthy and intensive negotiations we have been able to agree compensation with Nottingham Forest which will include a friendly at the City Ground.
"We would like to thank Sean for his efforts during his time at the club and we wish him all the best for the future.
"Crawley Town will now begin its search for a new manager, but in the meantime director of football Steve Coppell and head coach Craig Brewster will take over team management, starting with the friendly against Peterborough at the Broadfield Stadium on Saturday."