The 62-year-old former Chelsea striker, who was born in the town, replaces Mark Jones, who parted ways with the Puritans last week.
He takes over at a good time after two home wins, defeating Darlington in midweek following Saturday’s great success over Scarborough Athletic.
Despite a gap now appearing, he says stay up in his number one goal and he will take charge for the first time against Chester on Saturday.
Wilson joined the Puritans as a 17-year-old and scored 13 goals in 45 appearances, before moving to Derby County for £25,000 being going on to play for Ipswich, Chelsea, Northampton and Notts County.
He said: “I’m delighted to come back to my roots at Banbury United and manage the Club at this point in its history. The time is right. I love this club.
“I have been asked to come in, with the short-term goal of ensuring that Banbury United stays in the Vanarama National League North. The club is entering a very exciting phase, with an impending ground move that requires significant funds to be raised – we simply must stay in this league.
“From what we have seen, we have the talent on board to achieve this. I’ll have a different management style for sure, but I do not plan to make any rush decisions with the squad.”