Harrogate-born Wood, 42, has been in charge at National League One side Hull Ionians since 2017 but now moves to Emerald Headingley in the full-time role.
His appointment is the first step as the club move forward having had a Company Voluntary Arrangement approved and prepare for the 2019-20 Greene King IPA Championship season.
Wood started at hometown Harrogate but spent most of his playing career at Wasps before joining Bath where he went on to play in the 2004 Premiership final.
He earned his two England caps against Canada and the USA in 2001 having toured South Africa the previous year but has to retire at the age of just 29 in 2006 following a neck injury.
Wood said: “I am delighted to have the opportunity to lead Yorkshire Carnegie as the club’s new Director of Rugby.
“I am under no illusion that the challenge in front of us is massive this season but it is one I am looking forward to.
“I appreciate that it has been a frustrating time for everyone involved with the club over the past few months but hopefully we can start with a clean page now and start to rebuild the club.
“I would like to thank everyone at Hull Ionians for the support I have received and the understanding they have shown me over this appointment.
“It has been a fantastic place for me over the last three years and I have made great friends; it will remain a special club for me.”
Wood will now begin recruitment for his squad given all the first-team departed at the end of last season when the club hit financial problems.
Carnegie managing director Chris Gibson said: “Martyn has experience of the highest levels of the game but more importantly he is someone who understands the rugby culture within Yorkshire as well.
“We do have a big job on our hands rebuilding the squad for next season but Martyn is confident we can now begin to move forward and be ready to go come September.”
Carnegie kick off the new season at Nottingham in the Championship Cup on September 20.