The 34-year-old takes over from Andre Vos, the South African loose forward who stood down after captaining Quins for the last three years.
Volley only joined Harlequins on a two-year deal from French club Castres during the summer but director of rugby Dean Richards insists he is the man for the job.
"Some may find it strange to select a player who has only recently joined the squad to take over as captain," said Richards.
"But Paul has captained sides before in his career and has tremendous experience, particularly of the club game in England.
"I have no doubt that he'll lead by example both on and off the pitch, and be an inspiration to others within the team."
Vos pledged his future to Harlequins after they were relegated in 2005 and he led them to the National League One title and back into the big time.
Richards added: "He has been a tremendous servant to the club and we're delighted that he's decided to stay on for another season but he he felt the time was right for a change of leadership."
Volley, who spent 16 years with Wasps before signing for Castres, is determined he can help bring success back to the Twickenham Stoop.
"My short-term objectives are to earn the respect of my team-mates and the Quins supporters, while over the next two years I am confident the squad can achieve the goals we have set for ourselves - to qualify for the Heineken Cup and to reach a number of cup finals," said Volley.
"There is a lot of good banter and a great team spirit within the squad at present, with everyone working hard to be ready for the start of next season."