The 41-year-old Swede returns to North London outfit after previously managing the Under-15s during the 2016-17 season, before leaving to become then-academy director Andries Jonker's assistant when he took over at Wolfsburg.
Ljungberg will work under new academy director Per Mertesacker as Arsenal continue to make former players key figures in the youth setup.
"I'm delighted to be returning to the club," the former player told Arsenal's official website. "Arsenal has always been a special place for me and I'm really excited at this opportunity to work with our under-23 team.
"I look forward to working with the talented young players we have at the club. I know many of them well and will work hard to help them continue developing and become the best players and people they can be."
Mertesacker added: "It's great to have Freddie back at the club. He brings great footballing experience and the highest possible levels of enthusiasm, energy and encouragement for our young professionals."
Ljungberg moved to Arsenal in 1998 and spent nine seasons with 216 appearances for the club, scoring 46 goals and winning the Premier League title twice and the Emirates FA Cup three times.
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