Assistant manager Aaron Downes – who took interim charge of the team and oversaw Saturday’s 7-1 defeat by Grimsby – is to step down from his role.
Cotterill is a popular figure, having overseen the most successful period in Cheltenham’s history, having been in charge of the Robins from 1997 to 2002.
The 61-year-old took them from the sixth tier through the National League up to League Two in four campaigns and also won the FA Trophy in 1998.
In 2009, he turned down the chance to return to the club saying, his “heart told me ‘yes’, but my head told me ‘no’.”
The appointment links him up with new Cheltenham owner Mike Garlick, who took over the club on 23 August and who Cotterill worked with when he was manager of Burnley, during Garlick’s 17 years on the board at Turf Moor.
Cotterill has worked across the EFL during his time away from Cheltenham, also winning promotions with Notts County and Bristol City – the latter the League One and EFL Trophy double in 2015.
He has also worked at Nottingham Forest, Portsmouth, Birmingham and Shrewsbury.