Baraja made 364 appearances for Valencia between 2000-2010, winning the LaLiga twice as well as lifting the UEFA Cup, Copa del Rey and UEFA Super Cup. He also coached the club's youth team following his retirement.
"(Baraja) knows the idiosyncrasies of the club and returns home as a coach to contribute his professionalism and commitment after forging his legend in the 2000s," Valencia said in a statement.
The former Spain international has coached a string of teams in the Spanish second tier including Elche, Rayo Vallecano and Tenerife. He most recently coached Real Zaragoza in 2020.
Another former Valencia player, Carlos Marchena (43), will be part of Baraja's coaching setup.
Baraja replaces Gennaro Gattuso (45), who parted ways with the club last month.
Valencia have lost three straight league matches since Gattuso's departure, leaving them 18th in the LaLiga standings with 20 points from 21 games, a point adrift of safety.
Baraja's first game in charge will be a league game at fellow strugglers Getafe on Monday.
