The vastly experienced Australian had been linked with several coaching positions since leaving Belle Vue at the end of the 2010 season.
However, the 34-year-old appeared set to prolong his playing career after signing a 12-month contract with York City Knights but leaves the club without making an appearance.
Demetriou made over 200 Super League appearances for Wakefield and also played for a number of other clubs including Widnes and Rochdale.
Keighley Chairman Gary Fawcett is delighted to have Demetriou on board.
“The club is pleased to announce that it has agreed terms with Jason Demetriou to be the player-coach for next season,” he said.
“Jason will work with Glenn Barraclough and Matt Bramald to ensure we achieve automatic promotion to Championship next season.
“Given the quality of Jason and the existing coaching team I think this club can challenge the top of the Championship in 2012.”