Dell's appointment is effective immediately. He replaces Kevin Rollins, who also resigned as a member of the board.
Dell shares, which fell 7 cents to close earlier Wednesday at $24.22 on the Nasdaq Stock Market, jumped 99 cents, or 4 percent, in aftermarket activity.
In August, Dell recalled 4.1 million potentially flammable notebook batteries made by Sony Corp. and, after consistently posting earnings gains since its inception in 1984, also saw its profit drop. The company on Wednesday forecast fourth-quarter profit and sales below analysts' consensus estimates of 32 cents per share on sales of $15.30 billion.
The company's accounting practices also are the subject of federal scrutiny. The U.S. Attorney for the Southern District of New York has subpoenaed documents related to Dell's financial reporting from 2002 to the present.
Michael Dell has served as chairman since founding the company and was chief executive until 2004, when he handpicked Rollins as his successor. He defended the beleaguered executive in September, saying Rollins wasn't solely responsible for the company's recent missteps.
Rollins joined Dell in 1996 and had a variety of roles before becoming CEO, including chief operating officer, vice chairman and president of Dell Americas. Before Dell, he was vice president and partner of Bain & Co. management consultants.
"Kevin has been a great business partner and friend," Michael Dell said in a statement. "He has made significant contributions to our business over the past 10 years. I wish him much success in the future."
Dell's direct sales model, which allows business and consumers to buy equipment directly from the company, turned it into a leading computer manufacturer and a Wall Street juggernaut with one successful earnings announcement after another.
But in recent years Dell has been stung by a market glut of low-cost, low-profit PCs and weaker-than-anticipated sales of its pricier, more lucrative desktops and notebooks.
Just last year Dell lost its No. 1 position in the industry to rival Hewlett-Packard Co.
Recent reports from IDC and Gartner Inc. showed HP outgrowing the rest of the PC market and extending its lead over Dell in a worldwide tally of PC sales for the second quarter in a row.
HP's sales jumped 24 percent in the fourth quarter — its best such period since 2000 — while Dell's sales dropped about 9 percent. The shift left HP with 17 percent to 18 percent of the worldwide market in the fourth quarter, to Dell's 14 percent to 15 percent.
Analysts were generally surprised by the announcement but expressed hope that Michael Dell's return would reinvigorate the faltering company.
"It just goes to show us that on Wall Street, a CEO matters more to investors than does the bad news," Annex Research analyst Bob Djurdjevic said.
Samir Bhavnani, research director at Current Analysis, said shareholders had grown frustrated with Rollins' inability to design products as innovative or appealing as competitors like HP.
"Despite the fact that he never left the company like Steve Jobs left Apple, Michael Dell is well-tuned to the changes that are taking place and would be able to implement a vision that will turn the company around," Bhavnani said.
John Witt at Fitch Ratings said he was surprised by Rollins' departure, given Michael Dell's past assurances that Rollins would stay as CEO.
But, Witt added, "There's no one who knows the company better than him."