The former Southampton and Sunderland manager, who was also assistant to the former England manager Graham Taylor, succeeds Bryan Hamilton, who was sacked in October.
Joe Jordan will be McMenemy's assistant while Pat Jennings has been handed the role of specialist goalkeeping coach.
McMenemy's finest hour as a manager came in 1976, when he led Southampton, then in the old Second Division, to victory over Manchester United in the FA Cup final, while in 1983-84 they finished second in the old First Division behind Liverpool.
Taylor resurrected his career in 1990, when he appointed him as his assistant. He left, along with Taylor, in 1993 after England's failure to reach the 1994 World Cup finals.
In the summer of 1996 he returned to The Dell as director of football with the new manager, Graeme Souness. The pair helped keep Saints in the Premiership, but they resigned last May in a row with the board over money.
McMenemy's assistant, Jordan, has also been out of the game since the summer, after the former Scotland striker parted company with Bristol City at the end of his second spell with the club.
In the Concacaf Gold Cup in Los Angeles, Portsmouth's Paul Hall scored two goals as Jamaica defeated Guatemala 3-2 to keep themselves on course for the last four. Brazil reached the semi-finals after overwhelming El Salvador 4-0.