Nides, who previously worked for Morgan Stanley from 2005 to 2010, will work with clients and management as vice chairman and report directly to Chief Executive Officer James Gorman, the bank said in a press release.
Nides rejoins Morgan Stanley at a time when it is trying to boost returns and Wall Street must implement a raft of new rules to avoid a repeat of the devastating financial crisis.
While at the State Department Nides represented the United States abroad as deputy secretary of state and was responsible for management and resources at the department.
His return to Morgan Stanley is another instance of Washington's "revolving door" in which people routinely swap jobs between the government and the private sector, something critics say can craft overly cozy relations between the two.
Nides has long-standing ties to the Democrats, starting his career as a staffer for the House of Representatives, and later working Fannie Mae, the U.S. trade representative, and for investment bank Credit Suisse .
Morgan Stanley faces a big task for this year: boosting returns that have lagged peers, in large part because of high expenses in its wealth management group, and relatively low revenue in its bond trading business.
Its return on equity, a measure of how well the bank squeezes profit out of shareholders' money, was just 3.2 percent in the fourth quarter, far below the double-digit returns of competitors.
(Reporting by Douwe Miedema; editing by Andrew Hay)