The 39-year-old, who made 155 appearances between 2003 and 2007, will take on the role of first-team coach with the Glovers after most recently completing the same role at Oldham Athletic in League One.
Part of Yeovil’s League Two winning side in 2005, Terry returns to Somerset to build on the existing backroom staff of assistant manager Terry Skiverton, goalkeeper coach Steve Phillips and coach Jamie Shore.
Having worked for six years as an agent, Terry joined Richie Wellens at Boundary Park in November 2017 before moving onto his latest chapter at Huish Park.
Pleased with the addition, Way told YTFC.net: “Paul is someone who strengthens the backroom staff and has a wealth of knowledge in player recruitment.
Paul has personality, character and knows the history of this fantastic football. He’s the latest step in our bid to bring success back to Huish Park.”