Terzic enjoyed an interim spell in charge of Dortmund last season after Lucien Favre was sacked in December 2020, and led the club to DFB-Pokal glory.
Marco Rose was eventually named as full-time head coach but was sacked earlier this month with Dortmund having finished eight points behind Bundesliga champion Bayern Munich, and underwhelmed in both the Champions League and Europa League.
Borussia Dortmund has agreed to terms with Edin Terzic to become the new first-team head coach on a contract until 2025 🤝 pic.twitter.com/7PCDEM7Eyn— Borussia Dortmund (@BlackYellow) May 23, 2022
Terzic, who was first brought to Signal Iduna Park as an assistant to Favre and had been serving as technical director, consequently returns to the role on a deal until June 2025.
"By now, many people are likely to be aware of the special importance BVB holds in my life. I'd therefore like to express my sincere thanks to Aki Watzke, Michael Zorc and Sebastian Kehl for the great trust they have placed in me and for giving me this great responsibility," Terzic told the club's official website.
"We will do everything in our power every day to make the team and the entire club successful."
Soon-to-be sporting director Kehl added: "We held several intensive discussions with Edin Terzic last weekend and are convinced that this personnel decision is the right one for BVB.
"Edin knows our club, the environment, a large part of the team and the areas we would like to fine-tune to be able to offer successful football to our fans.
"The 2022-23 season constitutes a fresh sporting start. We will press ahead with this together with great joy and passion."
Dortmund has already been busy preparing for next season, with Salih Ozcan joining from Cologne on Tuesday – its fourth signing after Karim Adeyemi, Niklas Sule and Nico Schlotterbeck had already agreed to join.
However, Terzic will no longer be able to call on the talents of superstar striker Erling Haaland, who is moving to Manchester City.