The 75-year-old will come in as a replacement for Patrick Vieira, who was sacked last week after 20 months in charge.
Hodgson was previously in charge of Palace for four years but stepped down in the summer of 2021.
The former Liverpool and England manager returned to manage in the top flight at Watford for the second half of last season and had been out of work since the conclusion of that deal.
Palace have not won any of their last 13 games across all competitions and lie 12th on the Premier League table, three points above the relegation zone.
Hodgson's second spell in charge of Palace will start against Leicester City on April 1.
“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,” said Hodgson.
“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.”
Hodgson will be assisted by Paddy McCarthy, who took charge of the 4-1 loss at Arsenal on Sunday, and Ray Lewington.
“I would like to welcome Roy and Ray back to the club," said chairman Steve Parish.
"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.”
