Valverde, who last coached Barcelona and guided them to two league titles and the Copa del Rey, had been out of a job since he was sacked in January 2020.
"It's always an honour to coach Athletic," Valverde said. "This club means a lot to me. And I know what it means not just to Bilbao, but to a lot of other places around the world too.
"I made the decision to return because I believe this is a challenge which is exciting and demanding enough to make it worth a go.
"The main objective is that the fans feel proud and can identify with the team. We've got a good team to work with and that's what we're going to set about doing."
The 58-year-old had previously coached Athletic between 2003-2005 and 2013-2017, helping them win the Supercopa de Espana in 2015.
It was the first trophy the club -- which only selects players who are from or grew up in the Basque Country -- had won in the 21st century.
Athletic finished eighth in LaLiga last season, missing out on qualification for any European competition.