Barmby, 37, took caretaker charge of the Tigers in November following Nigel Pearson's return to Leicester, initially overseeing a run of five wins in his first seven games.
A disappointing three-game losing streak soon followed but, after leading Yorkshire club to a 1-0 FA Cup third round victory over Ipswich on Saturday, he has been handed the reins indefinitely.
Barmby announced the move into full-time management would bring down the curtain on his 21-year playing career.
The former England player told Hull's official website: "It is a great honour for me to become manager of my hometown club and I'm looking forward to the challenge.
"Although it has been a big decision to call time on my playing career, I have enjoyed my spell in charge so far and am excited about continuing to work with a talented group of players.
"It goes without saying that both myself, and the backroom staff that we have in place, will be working hard to ensure success."
Barmby, who moved to the KC Stadium in 2004, takes control having helped lead the club to sixth place in the npower Championship.
Hull's head of football operations, Adam Pearson, is hoping the stability brought about by the appointment will ensure a successful campaign.
"We are delighted that after a period of negotiation Nick has committed his future to the club as manager of Hull on a full-time basis," Pearson said.
"In his short spell as caretaker manager, Nick has already had a positive impact on the team, and his decision will provide a real boost as we go into the second half of the season."