Phelan was replaced at the helm of Otago United by Steve Fleming earlier this year after a three-year stint.
But Footballsouth has always been keen to keep the former Ireland international involved, and with regional development manager Johan Koutstaal moving on, there was an opportunity to rejig the management structure.
"Terry is going to be responsible for player development, which means getting involved with the junior players at all levels," Footballsouth general manager Bill Chisholm said.
"That could mean with representative teams but also at the grassroots level at clubs and schools.
"There has been a big push in the last couple of years with coach education and we want to continue with that."
Chisholm said Footballsouth had some very good candidates apply for the position, both within New Zealand and from overseas, but Phelan was the most qualified.
"He has a Uefa B licence and is working his way towards his A licence, so he is one of the more qualified coaches in New Zealand.
"He also has a great work ethic, he is very enthusiastic and is committed to the local scene. Although he is from overseas he has settled in and we've had really good feedback from his work in the community already."
Phelan's contract is for 12 months, but Chisholm said it was Footballsouth's intention to make the position permanent once more fixed funding could be arranged.
"Initially it is just for a year but we see it as a permanent position and part of our core business."
Phelan could not be reached for comment yesterday.
