Joining from Rochdale, McShane rejoins the Academy as playing coach, having left United as graduate in 2006.
The experienced defender and A-licence coach will combine his talents to provide a different perspective by coaching from within sessions and from an on-pitch perspective in fixtures when deemed appropriate.
Nick Cox, Manchester United Head of Academy, said: “Across the Academy, we have always taken an innovative approach to ensure that we continue our proud tradition of producing world-class players capable of excelling in Manchester United's first-team.
“This new role was carefully considered and adds yet another level of support for our players in helping them to play at the highest level possible.
“We believe that Paul is the perfect candidate. He arrives as an extremely highly recommended coach but also clearly still has a lot left to give on the pitch. This unique combination is invaluable for our Under-23s team and will further drive the professional standards of the group.
“As an Academy graduate, who has had an outstanding career, Paul knows the club inside out and can pass on this wealth of knowledge every day to our young players.
“Paul will now form part of a team of dedicated experts once again bringing the best external coaching talent to complement our existing group."
McShane said: “I am extremely pleased to be rejoining a club that means so much to me. I have been working on my coaching badges for several years and the opportunity to work with young players, whilst also playing in certain games, is the perfect role.
“I have developed a great deal of knowledge over my career and I look forward to mentoring and supporting the next generation of Academy graduates by passing on all of my experience.
“It feels very special to be back to where I began my professional career and I can't wait to get started in supporting these talented players to reach their immense potential."
McShane will solely represent United's Under-23s side as one of three permitted over-age outfield players in Premier League 2.