The striker originally joined the club from Dumbarton in a playing capacity halfway through last season, signing an 18 month contract, but couldn’t stop the Blue Brazil from being relegated to League One.
Manager Nicholl resigned shortly after relegation was confirmed on the season’s final day and the club have been considering their options since.
Nish will combine the role of player and manager as he hopes to haul the club back into the Scottish Championship.
A club statement read: “Cowdenbeath FC is delighted to announce that Colin Nish has been appointed as the club’s player-manager. Colin has a wealth of experience as a player and is a highly qualified coach.
“We are confident that we have the right man to lead us in the season ahead, a season in which we are determined to secure a return to the Championship. Colin has already started work to turn this aim into a practical reality.”
Chairman Donald Findlay added: “I am very pleased that Colin has agreed to accept the appointment as our player-manager. I have no doubt that he is the right man for the job and am grateful that he accepted my offer to become our manager.
“He will bring great enthusiasm to the task and we will continue to benefit from his contributions as a player. I hope and expect that everyone connected with Cowdenbeath FC will give him their full backing.”
Nish began his professional life at Dunfermline but his career really didn’t take off until he joined Kilmarnock in 2003.
After five years at Rugby Park he joined boyhood heroes Hibs, spending three years with the club and helping them qualify for Europe.
From there he played for Harlepool United and Dundee before landing at Dumbarton alongside former Hibs teammate Ian Murray in 2013. After 18 months with The Sons he was released and signed for Cowdenbeath.