The 35-year-old, who won a host of honours including two Champions Leagues and the 2006 World Cup as a player, has signed a one-year contract with an option for a two-year extension.
"Palermo... has entrusted Gennaro Gattuso with the charge of leading the Rosanero's first team," Palermo said on their official website.
Gattuso, who had an unhappy time as Sion player-coach last season, replaces Giuseppe Sannino who left after failing to prevent Palermo being relegated to Serie B.
Gattuso is moving from one impatient president to another.
Sion's Christian Constantin has employed about 30 managers since taking over the club for a second time in 2002 and sacked five last season alone, while Palermo president Maurizio Zamparini is so famous for his hiring and firing during 11 years at the club that he has been dubbed the "manager eater".
Zamparini has sacked at least 25 coaches although the exact number is subject to the definition of "interim" and the fact he has fired some of them more than once.
Last season alone he used three different coaches, two of them twice. Zamparini fired Gian Piero Gasperini, replaced him with Alberto Malesani for three games and then brought back Gasperini before sacking him after two matches.
He eventually returned to Sannino, who started the season as manager but was sacked after three matches. Sannino left at the end of the season after failing to save the club from relegation despite some good displays in the closing weeks of the season.
