Ranieri makes a return to the Islanders 31 years after he first left.
Cagliari were relegated from Serie A last season after finishing 18th and currently occupy 14th position in the Italian second tier.
Ranieri has been without a club since getting sacked by Watford in January this year after just three months in charge.
The much-travelled manager has signed a contract until the summer of 2025.
The 71-year-old led Cagliari to consecutive promotions from the third tier to the Serie A during his first stint between 1988 and 1991.
"Cagliari is pleased to announce it has reached an agreement with Claudio Ranieri who will take over the technical leadership of the first team," read a club statement.
"Now the return to the Rossoblu, where it all began, to write a new chapter in history. Welcome back Mister, it's nice to hug you again!"
Ranieri told the club website: “I’m going back to Cagliari: I’ve always known it, I declared it even then, at the time of my departure. Cagliari made me understand that maybe I could make it in my job, I had found all the elements that helped me in those three years: fans, players, managers, we were all one.
“In these days you have helped me make this decision, which was not easy for various reasons. We are bound by mutual respect and love, many beautiful memories.
“For this, I come with unchanged enthusiasm, love and passion, but I alone is not enough. The help of the club will be needed, which strongly wanted me, my new boys, our fans will be needed, especially them, to push our Cagliari to the results that we all strongly hope for.”
Ranieri has taken charge of a host of clubs in a storied managerial career that includes spells at Juventus, Chelsea, Valencia, Monaco, Fulham, Inter Milan, amongst others.
Ranieri was named FIFA Coach of the year in 2016 after leading an unfancied Leicester City side to a fairytale Premier League title despite being odds on favorites for relegation at the start of the season.
