The 36-year-old, who played 12 games for the Reds under Benitez in 2005, will become the second high-profile addition to the backroom team following the arrival of Sammy Lee earlier in the summer.
"His role will be first-team coach, and he'll also carry out specialist training sessions," Benitez told the club's website.
"He can also work specifically with the defence, and also the reserves.
"Pellegrino has a winning mentality. He won the Intercontinental Cup before going to Spain with Barcelona and Valencia.
"He has a lot of passion. When I asked him to come he was very pleased, but first he wanted to find out if there was a school where his three children could play good football. He is a football man."
Pellegrino had been coaching Valencia's youth team.