The 48-year-old ex-Georgia international, who scored 24 goals in 84 matches during his playing career with AEK from 1994 to 1997, has signed a two-year deal to succeed Gus Poyet.
'I enjoyed some amazing moments here as a player, playing good football in a team which back then had top Greek and foreign players,' Ketsbaia told the club's website.
The former Georgia international succeeds Gus Poyet in the role and signs a two-year deal at the club
'As soon as I started my coaching career I hoped that one day I might get the chance to come back.'
A former forward, who also played for Newcastle, Wolves and Dundee, Ketsbaia began coaching at Anorthosis in Cyprus in 2004, before a short spell with Olympiakos Piraeus in 2009.
He then coached Georgia for five years before returning to Cyprus for APOEL until April this year.
He inherits an AEK team which made a stunning return to Greece's top flight by winning the Greek Cup with a 2-1 victory over Olympiakos Piraeus last month following two years in the wilderness after bankruptcy in 2013.
Ketsbaia spent time in the Premier League at Newcastle during his playing career before moving into coaching
'There's no need for me to talk about the clubs goals, they are clear. We have to play a leading role at the top of the table,' he said.
'It won't be easy, a lot of hard work is needed but the club has obvious potential as is demonstrated by the fact the team won the Greek Cup this year.'
Under Poyet, AEK enjoyed an impressive league campaign, ending the regular season behind Olympiakos and second-placed Panathinaikos, before finishing third in the play-offs and securing a spot in the third qualifying round of the Europa League.