A former United player he is also a member of the club's hall of fame having scored 47 times in 173 appearances during his five-year spell at the club as a striker.
Paatelainen, who played for the Terrors between 1987 and 1992, has signed a contract until 2018 and was previously Finland head coach for four years.
Prior to that he was manager of Kilmarnock, Hibernian and Cowdenbeath
Dundee United chairman Stephen Thompson told the club website: "I am delighted to welcome Mixu back to the club as our new head coach
"He served United with distinction as a player and will do the same as a manager
His desire to come back to the club was clear from the first minute we spoke
He was the first person we spoke to and also the last
"His experience combined with his vision and enthusiasm for the club made him the standout candidate and we are thrilled to announce his appointment."
Paatelainen succeeds Jackie McNamara as boss of the Tannadice club currently sitting bottom of the table.
Source : PA