Bates spent eight years as first-team coach at Kingston Park between 1995 and 2003, before moving on to take charge of Scottish regional side Borders.
But with Borders set to be disbanded at the end of this season, Newcastle's rugby director John Fletcher was quick to secure Bates' signature.
"This is a very significant day for us," said Fletcher.
"Steve is an innovative coach who I have long admired, and someone we know very well from his time with the club.
"Players who have worked with him have nothing but good things to say, and I believe he has a big contribution to make to the coaching team.
"His appointment was very much driven by myself from day one purely because I hold him in such high regard.
"I have felt for some time that we were one light on the coaching team, but was adamant that we would not rush in to an appointment until the right candidate became available."
Bates joined Newcastle with former Wasps colleague Rob Andrew in 1999 and between them they established the Falcons in the top flight.
After securing promotion, Newcastle lifted the inaugural Premiership title in 1998 and won the domestic cup in 2001.
Bates, a former teacher at Lord Wandsworth College, also alerted Newcastle to the potential of a young Jonny Wilkinson, who was one of his pupils at the time.
Bates qualified Borders for the Heineken Cup and last year coached Scotland A to victory over England Saxons and into the Churchill Cup final.