Wilson initially joined Barnsley in 1993 and stepped up to become player-manager the following year after Viv Anderson's departure.
He took the club to the Premier League three years later, but they suffered relegation the following season and he left to take charge of local rivals Sheffield Wednesday in July 1998.
Former chairman John Dennis, who appointed Wilson for his first spell in charge, believes the club have made a good decision in bringing him back.
"I think it's great news for the club and everyone connected with the club will have a chance to get behind a very popular figure," he told
BBC Radio Sheffield.
"He's strong, he's determined and I think he will lift the spirits of everybody there.
"It'll be lovely to see him back and if he has half the impact that he had last time then that might be enough to get us out of the mess we're in."
After his spell at Hillsborough ended in March 2000, the former Northern Ireland international went on to have spells with Bristol City, MK Dons, Hartlepool and Swindon before returning to South Yorkshire with Sheffield United in May 2011.
Wilson took the Blades to the League One play-off final in his first season in charge, but was
relieved of his duties in April
with the club six points outside the automatic promotion places.
Barnsley are currently at the foot of the Championship table, having won only three of their 20 league games so far this term.
This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.