The 55-year-old former Dinamo winger replaced Dorinel Munteanu, who parted company with the side on Thursday after only six weeks in charge and was appointed coach of Russian Premier League strugglers Mordovia Saransk..
Dinamo, who reached European semi-finals twice in the 1980s, are seventh in the Romanian league with 30 points from 19 games, 17 points behind leaders Steaua Bucharest. Dinamo won their last league title in 2005.
Talnar, who signed a one-and-half-year contract, was in charge of Dinamo in the 1996-1997 season and then coached the team three times on an interim basis between 2007 and 2010.
"I'm convinced that Dinamo will again be a competitive team that fans can be proud of," said Talnar, who also coached Inter Sibiu, Universitatea Cluj-Napoca, Brasov and Ceahlaul Piatra Neamt in the Romanian top flight.
Earlier this month, UEFA said Dinamo were among several teams facing a one-year European competition ban unless their bills are settled by March 31.