The 35-year-old initially joined the League Two side in August on a player-coach basis and has made 18 appearances for them.
However, Forest Green currently sit in the relegation zone in the fourth tier of English football and have opted to make a change.
They parted company with David Horseman on Wednesday and have made Deeney their new head coach.
He said: "I am very pleased and honoured to be appointed as the new Head Coach. I know the fans will have many questions, which will be answered as soon as possible. We will not hide from the task at hand and will be open and honest along the way.
"One thing I can assure everyone is that we will work our very hardest to bring this wonderful club back to success.
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"This is an exciting new role with many challenges that I'll embrace and there's a lot of work for us to do, which has already started. I look forward to welcoming fans to our home game this Friday against Gillingham."
Horseman was appointed at The New Lawn in the summer following the relegation from League One under Duncan Ferguson.
However, he too struggled at the helm at Rovers as he won just four of their opening 20 League Two matches this season.
Forest Green are five points away from safety but do have two games in hand on Colchester United, who sit above them in 22nd.
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Deeney has now been handed the first full-time job as a coach following a career as player in which he played 628 matches.
The majority of those came at Watford, with the striker scoring 140 goals in 419 appearances for the Hornets.
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He proved key in their promotion to the Premier League in 2015, as well as 2021 before he left for boyhood club Birmingham City.
Deeney featured 56 times for the Blues and then joined Forest Green in August, with the Watford legend now taking the next step in his career.