The 46-year-old worked at Leicester between 2008 and 2013, initially as backs coach and then head coach, and during that time, the Tigers won three Premiership titles.
O'Connor will begin work in early April, subject to gaining a visa, and will replace current head coach Aaron Mauger, who will leave the Tigers after next Saturday's Aviva Premiership clash against Northampton.
Leicester chairman Peter Tom said: "The club have conducted an exhaustive search to find who we feel is the right person to take the team forward. And this brought up the names of a number of potentially very good coaches.
"One of the most significant factors in our deliberations was experience of the Premiership and what it takes to win the competition.
"Matt has that experience as head coach during a successful period which brought three league titles, an Anglo-Welsh Cup and the club's most recent appearance in the European Cup final.
"The team also topped the try-scoring figures in the Premiership four times in that five-year period with Matt in charge of the attack."