Roy, 47, is a Hall of Fame goaltender who won the Stanley Cup in 1986 and 1993 while with the Montreal Canadiens and in 1996 and 2001 while playing for Colorado.
"This is a very exciting day for our fans and a significant moment in our organization's history," said Avalanche team President Josh Kroenke. "Patrick's passion for the game of hockey both as a player and as a coach defines who he is as a person. He is a winner and is coming back to Denver where he created numerous special moments on and off the ice while helping lead us to two Stanley Cup championships."
Since retiring as a player after the 2002-03 season, Roy has since been the coach, general manager and co-owner of the Quebec Remparts of the Quebec Major Junior Hockey League.
"This is an unbelievable day for me," said Roy. "It's a new and exciting challenge that I am really looking forward to. I would like to thank Stan and Josh Kroenke for this opportunity as well as Joe Sakic for the trust they are putting in me.
"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."
Roy replaces Joe Sacco, who was fired after this season. Colorado was last in the NHL's Western Conference with 39 points. Sacco had been the Avalanche coach for four seasons.