The 69-year-old also managed the Blues on a temporary basis for the final three months of the 2008-09 campaign.
"I am excited to return," said the Dutchman. "Chelsea is one of the biggest clubs in the world but is not where it should be at the moment. "However, I am sure we can all turn this season around."
Hiddink watched Saturday's visit of Sunderland from the stands, sat next to Chelsea owner Roman Abramovich and former Blues striker Didier Drogba.