The 75-year-old was approached by Palace after they sacked Patrick Vieira last week and is now poised for a sensational Selhurst Park comeback.
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Paddy McCarthy, who has been in interim charge since Vieira's sacking, and Dean Kiely are set to remain as part of Hodgson's backroom team.
Hodgson's trusted assistant Ray Lewington is also returning to the club as his number two.
Hodgson spent four years in charge at Selhurst Park - from 2017 to 2021 - and has maintained a good relationship with the Eagles hierarchy.
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He had a brief spell at Watford last season but was unable to steer them away from the Premier League's relegation zone.
He declared his time as a top-flight manager over after leaving Watford, however he has now been tempted out of retirement.
Hodgson brings a wealth of experience in management in a career spanning over four decades. He's been in charge of teams across Europe, and has led Liverpool, Inter Milan and England.
Palace have been on the lookout for a new manager having relieved Vieira of his duties last Friday amid relegation fears.
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Vieira was named Eagles manager in 2021, finishing 12th in the league last season, 13 points from the bottom three.
Vieira's final match in charge capped off a worrying 12-game winless run, with the three fixtures before Brighton seeing Palace fail to manage a single shot on target.
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The winless run was extended to 13 as they were swatted aside by Premier League leaders Arsenal, losing 4-1 at the Emirates Stadium on Sunday.
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The woeful run in 2023 has left Palace just three points from the relegation zone, having looked destined for safety before the World Cup break.
Hodgson was replaced by Vieira in 2021 but is now expected to succeed the Arsenal and France legend.
But a former player of Hodgson from his days at Fulham, Danny Murphy, is unsure about the veteran making yet another return.
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"It seems a strange one," Murphy told talkSPORT. "There was a bit of discontentment with Roy at the end and the way Palace were playing.
"I love Roy to bits but I would like to see him stay away from it because I think it would be a really sad way to end if he was to go in there and Palace were to go down.
"I wouldn't take the risk if I was him just for one more round of applause or one more 'thanks Roy.' He's had enough plaudits, he's had a great career, he's fine for money.
"I'm thinking of him. Don't put yourself in it, don't give yourself the stress, the drama."