Granato was an assistant for the team last season under head coach Joel Quenneville, who was fired after the Avalanche went 44-31-7 and was swept by the Detroit Red Wings in the second round of the playoffs.
Granato coached Colorado for parts of two seasons from 2002-04, building a 72-33-17 record. The Avalanche made the playoffs both seasons under Granato. Overall, he has been with the team for six seasons.
Avalanche General Manager Francois Giguere said Thursday that Granato had gained "tremendous coaching experience" while behind the Colorado bench.
"I'm excited about this challenge," said Granato. "I know this team has a great mix of youth, experience, skill and speed. I'm looking forward to this new opportunity ahead."