General manager Bryan Murray, who served as the club's head coach last year, made the announcement at a morning news conference.
"John is known and respected by our players and that was a big reason in his being named head coach," Murray said.
Paddock spent the last five years in the Senators organization, including the last two as Ottawa's assistant coach. He takes over from Murray, who, after leading the club to the Stanley Cup final, moved up to general manager.
"This is an extremely exciting day to have an opportunity to coach a team I've been associated with for five years," Paddock said.
Paddock, 53, a native of Oak River, Man., has prior head coaching experience with the now defunct Winnipeg Jets and also served as a head coach in the American Hockey League with the Binghamton Senators.
He was named Jets coach in 1991, becoming the first Manitoba-born coach of the franchise. He would later add the job title of general manager and ultimately relinquish his coaching duties in early 1994.
He held that position even after the team relocated to Phoenix, until December 1996.
Paddock said while he hoped to one day return to the NHL as a head coach, it wasn't a goal that consumed him.
"I'm not sure it's something you think about," he said. "It's something you hope for.
"I thought it would happen at some point but it if didn't, it didn't."
Added Murray: "I never considered John as an assistant coach. I considered him a partner."
Paddock was selected in the '74 NHL entry draft by Washington and played only eight games with the club before being dealt to Philadelphia.
In the 1980 Stanley Cup final, Paddock scored the tying goal in the sixth game to force overtime, however Bob Nystrom scored at 7:11 of overtime to earn the New York Islanders the NHL championship.