The 46-year-old Canadian replaced Adam Foote, who was fired two weeks ago after guiding the Canucks to an NHL-worst 25 wins in 82 games.
Malhotra spent four seasons each as an assistant coach with Vancouver and Toronto before coaching the Canucks' top development club to a league title two seasons ago.
"Manny and I have been in the battle together before, so I know firsthand what a good teacher, leader, and quality person he is," Canucks general manager Ryan Johnson said Monday night in announcing the move.
"Connection, consistency and putting in place the proper foundation will be key for our group moving forward.
"Manny is a great coach who has the right skillset and mentality to help players develop and get better each day."
Malhotra scored 116 goals in 991 games as a center with the New York Rangers, Dallas, Columbus, San Jose, Vancouver, Carolina and Montreal.
The Canucks have missed the playoffs in five of the past six seasons and have not gone beyond the second round since falling to Boston in the 2011 NHL Final.
The Canucks, last in goals allowed and penalty killing last season, will have the third pick in this month's NHL Draft.