The Sky Bet League Two side had placed striker Ronnie Jepson, another ex-player, in interim charge until January but have moved on from him and quickly appointed Flitcroft, who was sacked by Barnsley on November 30.
The 39-year-old made over 100 appearances for the Shakers between 2004 to 2006 and returns to a team currently two points away from the relegation zone.
Flitcroft preserved the Tykes' Championship status at the end of last year with an impressive end-of-season run which saw them lose just one of their final eight games, only to be dismissed from his position last month after securing a solitary victory in a 12-game sequence in this campaign.
"I have been a long-time admirer of David and what he achieved at Barnsley was a credit to him and to his philosophy of hard work and dedication," said Bury chairman Stewart Day, whose club have been linked with numerous potential managers since Kevin Blackwell's axing in mid-October.
"This is my first managerial appointment as a chairman and it needed to be the right one, hence I would not be rushed."
The length of the contract handed to Flitcroft was not disclosed but Day admitted to making the appointment with Bury's "five-year goal" of reaching the Championship in mind.
"I am confident that after meeting with David and his team that we have secured the best manager available to take us to the next level and help us achieve the five-year goal," Day added.
"David is a dedicated individual that will not accept anything but the best for Bury Football Club.
"He had received offers from other clubs at a higher level, but he has bought into what we are trying to achieve at this club and has committed his future to take us back to where we belong, the Championship."
Jepson was given an extended period of time to prove he was worthy of the managerial position on a full-time basis after receiving the support of the squad.
However, he was unable to reverse the team's fortunes with Bury only winning twice since August.
Day added: "Together with the board I would like to thank Ronnie for all his hard work and commitment and wish him well for the future, but he will be leaving the club with immediate effect.
"I knew the first year would be difficult both on and off the pitch, but I promise to continue to work tirelessly to deliver the five-year plan.
"All I can ask is that then fans come out on Saturday to give our new manager the support he deserves and start the march back up the league."
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- Ronnie Jepson