The 37-year-old, who has been acting as caretaker boss for the Tigers since November, has committed his services to the Championship side on a full-time arrangement.
"It is a great honour for me to become manager of my hometown club and I'm looking forward to the challenge," Barmby told the club's official website. "Although it has been a big decision to call time on my playing career I have enjoyed my spell in charge so far, and am excited about continuing to work with a talented group of players.
"It goes without saying that both myself and the backroom staff that we have in place will be working hard to ensure success."
Head of Football Operations Adam Pearson added: "We are delighted that after a period of negotiation Nick has committed his future to the club as manager of Hull City on a full-time basis.
"In his short spell as caretaker manager Nick has already had a positive impact on the team, and his decision will provide a real boost as we go into the second half of the season."
Barmby spent eight years as a player for the club.