The 47 year old has been out of work since leaving a role as assistant at West Ham in the summer of 2010.
He told Liverpool's official website: "I was sat at home doing nothing and now I've got the chance of working with a football great in Kenny Dalglish and also working for one of the world's leading football clubs.
"This was something I couldn't turn down."
"I am grateful for everybody who has given me such a warm welcome, especially all those here at Melwood," he said.
"I am really looking forward to working with Kenny and the rest of the staff to help bring good times back to the club."