The Belgian top division side said in a statement late on Thursday that Preud'homme, 54, had signed a contract until June 2016. The news came on the same day that Bruges sacked predecessor Juan Carlos Garrido.
"I'm looking forward to getting started at Club Bruges. There is a huge sporting challenge waiting for me and I want to get stuck in," Preud'homme, who has been coaching Al-Shabab, said in the statement.
He and the Saudi Arabian club agreed to part ways on Wednesday after their exit from the Asian Champions League and Preud'homme hoped to be present on Sunday when Bruges host Belgian champions Anderlecht.
Preud'homme, capped 58 times for Belgium, won the European Cup Winners Cup with Mechelen in 1988. As coach, he steered Standard Liege to their first league title in 25 years in 2008 and led AA Ghent and Dutch side Twente Enschede to domestic cup success.
"We are delighted that Michel has chosen Club Bruges. He has proven success at the top level and will make his mark here too," said sporting director Arnar Gretarsson.
Bruges sacked coach Spaniard Garrido, a former coach at Villareal, after just 10 months in charge.
The Belgians, unbeaten in the domestic top flight but out of the Europa League, are eager to relive some of their past glory.