"Zizou... will start a new stage of his career at Real Madrid," Real said on their website.
"Zidane will be joined by youth coach Santiago Sanchez and has already started working on future plans for the reserve team squad."
The appointment ends speculation concerning reports that the 42-year-old was about to return to his former club Bordeaux to take up his first managerial role.
Zidane also represented Juventus before joining Real Madrid in 2001 for a then-world-record fee of $66 million (38.88 million pounds) and finished his playing career at the club, where he is expected to take over the managerial role at some point in the future.
Zidane will be expected to guide Castilla back into the second division of the Spanish football league from where they were recently relegated.
(Reporting by Amlan Chakraborty; Editing by John O'Brien)
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