Royle, 59, who managed the club for 12 years until 1994, will remain in charge at Boundary Park until the end of the season.
In his first spell with the club, Royle guided the Latics to the 1990 League Cup final and to two FA Cup semi-finals.
He also helped the club reach English football's top-flight in 1991 and kept them there for three seasons.
Royle went on to manage Everton, Manchester City and Ipswich Town, leaving Portman Road at the end of the 2005-06 campaign.