Tigers boss Steve Bruce has been looking for backroom reinforcements for several weeks while Phelan is fresh out of a short stint with Championship side Norwich City.
The 52-year-old has held talks with the Premier League strugglers in the past few days and struck a deal in principle to fill the void left by Steve Agnew in the club's coaching team.
Phelan, who cannot formally begin his new role until 1st February, played alongside Bruce at Old Trafford, between 1989 and 1994, where they won the Premier League, FA Cup and European Cup Winners’ Cup together.
Despite a spending spree like no other in the Tigers' history last summer, the East Yorkshire side find themselves in the relegation zone with nineteen points - just two more than bottom side Leicester.
Meanwhile, City have had a £3m bid accepted for Lokomotiv Moscow striker Dame N'Doye.
"With the problems we've had up front, something that gives us a bit more firepower will be ideal," Bruce said this week.
The former Sunderland boss also revealed that Hull are in negotiations with another top flight club over bringing in a loan signing to replace the recently-departed Hatem Ben-Arfa.
The 27-year-old Frenchman was this afternoon informed that he is ineligible to play for new club Nice until the new campaign.
Fifa regulations state: "Players may be registered with a maximum of three clubs during one season. During this period, the player is only eligible to play official matches for two clubs."
In other news, former Tigers striker Dean Windass has been appointed the club's first official ambassador.
The club legend famously scored the only goal against Bristol City which sent them into the Premier League for the first time via the Championship play-offs in 2008.