The iconic Anfield figure has accepted an invitation to become non-executive board director and will take up his position with immediate effect.
"It is an honour and privilege to be asked to return to Liverpool as a director of the club," said the Scot, fired in May 2012 after a disappointing end to the season in his second spell in charge.
"I have always said if there is anything I could do to help this club I would make myself available - when the call came I had no hesitation.
"I am looking forward to working with the board of directors and contributing to the strategic issues that affect Liverpool Football Club.
"Liverpool has given me and my family so much since we came here just over 36 years ago and my priority is and will always be to have the club's best interests at heart."
Owners Fenway Sports Group wanted to bring back Dalglish in order to benefit from his vast experience and close affinity with supporters, who still regularly sing his name at Anfield.
"We are delighted Kenny has accepted our offer to join Liverpool as a non-executive board director and we are sure he will make a valuable contribution to the club's strategy," principal owner John Henry said.
"Kenny has a unique relationship with our supporters and embodies everything that is special about Liverpool.
"We are thrilled that the club will benefit from his experience and passion for the club and our supporters.
"Kenny has a unique insight on the values and traditions that helped to make Liverpool one of the greatest sporting institutions, not just in football, but in world sport.
"We are proud and honoured to have him back at the club he has represented with such distinction."
Dalglish's successor as manager, Brendan Rodgers, has immersed himself in the club's history since taking over and has regularly spoken about delving into the club's rich past in an attempt to improve their future fortunes.
Only this week he revealed how former players Robbie Fowler, Steve McManaman and Rob Jones had been brought on board to work with the under-21 and under 18 sides at the club's Kirkby academy.
"When I met with Kenny to discuss this appointment, I was struck by the passion and drive he still has in wanting to see Liverpool return to where it should be; one of the most successful club's in the world," he said.
"We are all together in that goal - owners and supporters, players and management and also icons such as Kenny Dalglish.
"I want people around us who have this club and what it stands for in their heart."