Lillis, 51, has been coaching in Spain since leaving Morecambe - where he had been assistant to Sammy McIlroy - in May
Terriers manager Lee Clark said: "Mark has an excellent reputation in the game, particularly when it comes to working with young players, and has worked at all levels of football - from international level to the Premier League, the Championship and helping to guide Morecambe into the Football League.
"I'm looking forward to working with him, as is Steve Watson and the rest of the coaching team."
Lillis spent two seasons at Glanford Park as a player from 1989 to 1991, and returned to Glanford Park as assistant to Brian Laws in 1996.
He left to become Halifax manager in 1999, before starting a fruitful partnership with McIlroy which took him to Stockport, the Northern Ireland national team then Morecambe.
His son Josh came through the youth system at Glanford Park and became the club's first-choice goalkeeper this summer.