Sporting director Jochen Schneider said in a statement: "We are delighted to have hired a coach in David Wagner who perfectly fits in with our required profile: someone whose footballing philosophy has his team take the initiative, with intensity and as much speed as possible, but also someone who can build a team with his personality and improve players individually."
"I know from my own best experience as a player the strength that Schalke 04 can develop when the team, club and fans pull together," Wagner said in a statement.
"To dive into this world again and help to change the current situation for the better – that is the biggest motivation for me to return to the Bundesliga."
Wagner played for Schalke from 1995-97, making 29 appearances for the club and scoring two goals.
A former Germany youth international who featured for the United States at the senior level, Wagner broke into with coaching with Hoffenheim's youth ranks but made a name for himself at Borussia Dortmund under Jurgen Klopp, leading the club's reserve side from 2011-15.
He would parlay that into a successful tenure with Huddersfield, taking over the Terriers in November 2015 and guiding them to the Premier League via the play-offs just a season later.
Despite expectations of relegation in his first season in the top-flight, Wagner guided the team to survival in the 2017-18 season, finishing 16th and four points above the drop zone.
However, that magic did not extend to the club's second season in the Premier League, as the Terriers struggled near or at the foot of the table all term.
Wagner would depart the club by mutual consent in January, but the results did not improve, with Huddersfield matching the record for the earliest confirmed relegation from the Premier League in March.
He inherits a Schalke team that nearly suffered a similar drop from the top-flight this season after a brilliant 2017-18 campaign saw them finish second in the Bundesliga under Domenico Tedesco.
But Schalke never could find their way this season, with even their only bright spot qualification to the Champions League knockout stage.
However, even that ended disasterously, as Manchester City hammered them 7-0 in the second leg, with Schalke crashing out of the competition with a 10-2 aggregate defeat.
Tedesco was fired after that loss in March and the eight points taken from a possible 21 since has been enough to confirm their survival in the Bundesliga.