The Avalanche had reportedly been in talks with Roy to take over the heading coaching job made vacant when Colorado fired Joe Sacco last month.
Roy, 47, becomes the sixth head coach in Avalanche history and the 14th in franchise history; the team began as the Quebec Nordiques and moved to Denver before the 1995-96 season. The team won the first of two Stanley Cup titles that season, with Roy in net.
He takes over an Avalanche squad coming off a season in which it finished last in the NHL's Western Conference and missed the playoffs for a third straight season.
"This is an unbelievable day for me," Roy said. "It's a new and exciting challenge that I am really looking forward to. Almost 10 years to the day that I announced my retirement as a player I am back in Denver and hope the fans are as excited as I am."
The Quebec City native spent the last eight seasons as head coach and general manager of the Quebec Remparts of the Quebec Major Junior Hockey League.
Roy's younger brother, Stephane Roy, let the secret out earlier this week, posting a Facebook note saying his brother would be the new coach. Fans in the Mile High City have been enthralled all week, hoping two of the most beloved players in team history would team up again.
"This is a very exciting day for our fans and a significant moment in our organization's history," team president Josh Kroenke said.
Following the season, the Avalanche shook up their front office, naming Kroenke as their team president and giving Sakic more of a say in every day hockey decisions. Sakic's first task was to find the next coach.
Naturally, he turned to someone he knows quite well.
"All along Patrick was our top candidate and we are thrilled that he has decided to accept this offer," Sakic said. "Patrick has a great hockey mind, is a tremendous coach and there is no one more passionate about this game. He will bring that winning attitude to our dressing room to help this young team grow."
Roy, who was inducted into the Hockey Hall of Fame in 2006, ranks second in NHL history among goaltenders with 551 wins. The four-time Stanley Cup champion holds the record for most playoff wins with 151, and is the only player to win three Conn Smythe trophies as the post-season MVP. He also won three Vezina trophies as the NHL's top regular-season goalie.
Roy backstopped the Montreal Canadiens to two Stanley Cup championships (1986, 1993) and led the Avalanche to Stanley Cup titles in 1996 and 2001.