The 46-year-old had a brief spell at Victoria Park at the end of his playing career, before returning as assistant manager to Colin Cooper in the 2013-14 season, and takes over with the club just four points above the drop zone.
"It was essential that we moved quickly to get a new manager in place," chairman Gary Coxall said of Hignett's appointment. "We immediately identified Craig as our number one target and we believe he has all the right qualities to help instil confidence back into the players and help us move up the table.
"He has a wealth of experience in football and has been looking for an opportunity to move in to management so we're delighted to give him that chance here at Victoria Park."
Hignett will take charge for the first time on Saturday as the Pools entertain fellow strugglers Yeovil Town.