Knudsen will take over from Steffen Hojer and has signed a two-year deal.
"It is a scoop for Danish football that we can hire such a large coaching capacity for the job to develop our next national team players."
"Lars Knudsen is a professionally very competent coach with extensive knowledge of talent development, Danish football and and our style of play. We are sure that he will be able to continue the development of the U21 national team", says technical manager of the Danish FA, Anders Gerber.
Lars Knudsen stepped in last autumn as interim coach, when the appointed A-national coach Morten Wieghorst was on sick leave with stress symptoms.
Knudsen led the team in four games, winning two, drawing one and losing one, before handing over the reigns to Brian Riemer.
Knudsen is currently part of Jess Thorup's coaching staff at Augsburg in the German Bundesliga, but he is looking forward to returning to Danish football.
"I am proud and happy to have the opportunity to develop the greatest Danish talents. I have been looking for a challenge where I can use my skills as a head coach and influence development", says Lars Knudsen.