The League One club announced the 51-year-old Scot had taken the reins in succession to Ian Burchnall, whose departure was confirmed earlier this week with the side rooted to the bottom of the table.
Ferguson was a fans’ favourite as a player at Goodison Park across two spells, first between 1994 and 1998 and then between 2000 and 2006. He was an FA Cup winner with the Toffees in 1995.
He joined Everton from Rangers, who a year earlier had paid a then British record transfer fee of £4million to Dundee United for his services. He also had a two-year spell playing for Newcastle United and earned seven caps for Scotland.
After hanging up his boots Ferguson joined the Everton coaching staff and served as interim boss in 2019 and again in 2022, but this represents his first head coach role.
He said: “I’m really delighted to join FGR for the next step of my career, and I plan to be here for a while.
“We have a bit of a fight on our hands to stay up in League One and I am ready for the challenge.
“I am grateful for the opportunity to come and lead such a progressive and forward-thinking club too.”
Forest Green chairman Dale Vince added: “We’re all excited to welcome Duncan, he is someone I have admired from afar for a while.
“It’s just fantastic to have the opportunity to work with him in this next phase of our journey toward the Championship.”