Ljungberg helped Arsenal win the Premier League twice and the FA Cup three times in a nine-year spell from 1998 to 2007.
He scored 46 goals in 216 appearances for Arsenal and, after retiring in 2014, the Sweden winger spent a season coaching Arsenal's U15 side.
Following a short spell as Wolfsburg assistant manager, Ljungberg returns to the Emirates Stadium after Arsene Wenger ended his 22-year reign as Arsenal manager at the end of the season.
"I'm delighted to be returning to the club. Arsenal has always been a special place for me and I'm really excited at this opportunity to work with our under-23 team," Ljungberg said on Tuesday.
"I look forward to working with the talented young players we have at the club.
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"I know many of them well and will work hard to help them continue developing and become the best players and people they can be."
Ljungberg played a prominent role in Arsenal's Premier League and FA Cup double triumph of 2002 and was part of the 'Invincibles' team which went unbeaten for the 2004 league campaign.
Ljungberg, who also played for West Ham, Seattle Sounders, Chicago Fire and Celtic, joined Wolfsburg as former Arsenal Academy manager Andries Jonker's assistant in 2017.
But he left when Jonker was sacked as manager of the German side after just seven months in charge.
Arsenal's new Academy chief Per Mertesacker said: "It's great to have Freddie back at the club.
"He understands the club's values and how important it is to give young players the opportunity to grow and develop."
Maitland-Niles signs new deal
Arsenal starlet Ainsley Maitland-Niles has penned a new long-term contract at the Emirates.
The promising 20-year-old is a product of the club's academy and enjoyed a breakthrough season at the Emirates Stadium during the last campaign.
While former boss Arsene Wenger utilised Maitland-Niles mainly as cover at full-back, he still went on to make 28 appearances for the club.
With the Gunners in the Europa League last season, Wenger used the competition to blood a number of highly-rated youngsters.
While the likes of Reiss Nelson and Eddie Nketiah also tasted first-team action it was Maitland-Niles who arguably impressed the most.
After being part of the England Under-20s team to win the World Cup in South Korea last summer, signing a new deal at Arsenal is the culmination of a big year for Maitland-Niles.
