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The former Hammers captain has signed a two-and-a-half-year contract, returning to the club where he made more than 100 appearances between 2007 and 2011.
He replaces Nuno Espirito Santo, who was dismissed after a disappointing start to the season, with West Ham sitting eighth in the Championship following consecutive defeats.
Parker said: "It is a very proud moment for me to step into this role and return to a club that means so much to me and my family. I have a lot of very fond memories of my time here – four years of probably the best football I played in my career.
"There was a warmth, a love, a feeling that I probably didn’t have anywhere else. More than anything, this is an opportunity that I am very excited about."
West Ham interim CEO Karim Virani said: "He is someone who is held in high regard at West Ham United and throughout the game, and he was the unanimous choice of the board to become our new head coach."
Parker brings experience in securing promotion to the Premier League, with his last promotion coming with Burnley.
He said: "I feel privileged and honoured to be the guy that wants to lead us back to the Premier League. I’ve been in this division three times and I’ve got out of this division three times.
"This is a tough division, there is absolutely no denying it. And I will use every ounce of my experience, every ounce of my knowledge."
The 46-year-old will be supported by first-team coaches Steve Potts, Gerard Prenderville, and Billy Lepine, and will also work closely with another former team-mate, Mark Noble. Parker will be in charge for Wednesday’s Championship trip to Cardiff.