Palermo takes charge of the club from the Andean province of Mendoza just two matches from the end of the "Inicial" championship, first of two in the season, with Godoy Cruz 15th on 19 points from 17 matches.
"We're convinced he is the best option. We know what Martin Palermo means because he's a national and world figure," club president Mario Contreras said.
Palermo will make his debut on the bench in Godoy Cruz's home match with relegation threatened Quilmes in Mendoza city on Saturday before travelling on the last weekend of the season to face former club Boca Juniors at La Bombonera, scene of many of his exploits as a player.
"First there's Quilmes, then we'll think about Boca," the 39-year-old Palermo said.
He will have two former Boca team-mates as his assistants, Argentina's 2006 World Cup goalkeeper Roberto Abbondanzieri and Rolando Schiavi, Boca's 39-year-old centre back who will be making his final appearance against Godoy Cruz as a player before retiring.
Palermo played 15 times for Argentina and attended the 2010 World Cup finals in South Africa.