His appointment is a huge coup for the Demons, who sacked Mark Neeld as coach midway through 2013, also churned through a chief executive and a chairman, and won just two matches for the year to finish second-bottom.
Roos, 50, also had a stellar playing career, featuring in 356 matches for Fitzroy and the Swans.
“We’re absolutely delighted Paul has agreed to this role for at least the next two years,” Demons chairman Glen Bartlett said.
“His appointment is the most significant news for this club for a very long time.”
Roos’ contract is for two years, with a one-year option.
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Roos said he had initially not been interested in returning to senior coaching when new Demons chief executive Peter Jackson spoke to him 12 weeks ago.
But his mood changed when Jackson put to him the prospect of being the senior coach, with a firm succession plan in which an upwardly mobile assistant would eventually take over.
“One of the turning points was when Peter came to me and asked ‘would you be interested in heading the organisation, then handing it over to someone else?'” Roos said.
“That really sparked the interest. I’m extremely, extremely excited about being introduced as the Melbourne coach.
“I’m really looking forward to setting a direction for the players and the football club, and setting some really high standards.”