Muscat, who has served as a Victory assistant under four coaches, including new Socceroos boss Ange Postecoglou, has been appointed for two seasons.
The 40-year-old will take the helm for the first time in Monday night's Etihad Stadium clash with Wellington Phoenix.
Phoenix coach Ernie Merrick was the Victory's inaugural coach and Muscat the club's inaugural captain, the pair combining to lead Melbourne to A-League championships in 2006-07 and 2008-09.
Muscat also started his coaching apprenticeship under Merrick, as a playing assistant during the tail end of his playing career.
The two-season deal includes the current season, but Victory chairman Anthony Di Pietro said the club was confident Muscat would be in the job long-term.
"As head coach, it's not about being a favourite son, it's about being a father figure," Di Pietro said.
"And we've given him the opportunity to write that (history) and we look forward to that and hope that this is a long-term relationship.
"In fact, dare I say, I hope he's in contention for the next Socceroos job, that would be a demonstration of what has been achieved."
Muscat said he had learnt a great deal from Postecoglou over the past season-and-a-bit and wouldn't be straying far from his predecessor's path.
"One thing's for sure, over the last 18 months the football team now has an identity," he said.
"There's a certain DNA that's expected from Melbourne Victory when they perform now.
"My ego doesn't tell me that I need to fracture what's happened in the last 18 months and rebuild it."
He said the club was capable of claiming the championship in his first season in charge.
Di Pietro said the club hadn't considered any other candidates and continuing what had been built under Postecoglou was important.
"It was clear that we had a program in place and Kevin was by far the best-placed person to continue that on," Di Pietro said.
"It wasn't a decision made with comfort or ease, it was a decision made because it was the right decision."
The Victory are yet to appoint a permanent assistant but youth team coach Darren Davies will fill the role in the lead-up to the Wellington game.