Murray returned to Boundary Park in January on a short-term deal after he was released by Hartlepool and will now retire from playing at the age of 36 to concentrate on the role.
Boss Lee Johnson told the club's official website: "I have spent the last three months getting to know Paul and I like his work ethic and commitment to the club and to my team.
"I am delighted to have him on board. It is a great opportunity, as well as a big responsibility, to have a role like this at a club like Latics."
Murray added: "I am excited to be involved and look forward to working with the gaffer who has a great knowledge and enthusiasm for the game.
"I have been chatting about the job for some time and, now the deal is done, I cannot wait to get started and hopefully be part of something successful here."