The Bundesliga's basement club have been without a head coach since the sacking of Joe Zinnbauer in March, with sporting director Peter Knabel taking caretaker charge in the meantime.
Labbadia - a former Hamburg player - was previously dismissed by the club in 2010 after less than 10 months in the hot seat.
Former Mainz chief Thomas Tuchel had been heavily linked with the position in recent days, and Hamburg CEO Dietmar Beiersdorf confirmed talks had taken place.
Beiersdorf revealed, though, that discussions over a potential deal to bring Tuchel to the Imtech Arena had reached "deadlock", prompting the club to turn to Labbadia, who last managed at Stuttgart from 2010 to 2013.
Hamburg are four points adrift of safety and face a trip to local rivals Werder Bremen on Sunday.
"I expect full dedication and passion of all stakeholders in the coming weeks," said Beiersdorf. "We now need to quickly develop a sense of achievement."
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