Guidolin, who spent last year coaching French side Monaco, replaces Giuseppe Papadopulo. Palermo finished eighth last season to earn a place in the Intertoto Cup.
"I restart the journey that was interrupted a year ago with renewed enthusiasm," the 50-year-old Italian was quoted as saying in Corriere dello Sport on Tuesday.
"I'm delighted to return to Palermo's bench, but I don't want to add anything else until I've discussed my plans with the club."
Serie A
Deschamps lined-up by Juve
20/06/2006 AT 12:07
Guidolin has also had coaching spells at Vicenza, Atalanta and Udinese in Serie A.
Serie A
Deschamps lined-up by Juve
20/06/2006 AT 12:01
Serie A
Cagliari name Giampaolo as new coach
17/06/2006 AT 13:14