Phelan, 45 years-old, replaces Carlos Queiroz, who left his position to take over as Portugal's coach in July.
"Mike knows Manchester United inside out, having been associated with the club for the best part of 20 years," manager Sir Alex Ferguson said
"I am delighted that Mike and Rene have agreed to fill these important position," added United boss
Brian McClair and Laurent Blanc had also been linked with the vacant post.
Phelan has been working as a first team coach since 2001, the year Steve McClaren left to coach Middlesbrough.
He played more than 100 games in five years at United, earning a Premier League winners medal in 1993.
Source: BBC Sports
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