Hill, who competed in F1 between 1992 and 1999, will provide expert analysis on Sky Sports F1 as part of Sky's controversial rights deal to show the motorsport from 2012 to 2018 with the BBC.
Sky's first channel dedicated to one single sport will launch in March, offering live coverage of all Grand Prix, practice and qualifying sessions in standard and high definition.
Alongside launching on Sky's pay-TV platform, Sky Sports F1 will also now become available on Virgin Media's cable television service, but only in SD.
Hill joins a new Sky presentation team made up mostly of ex-BBC talent, including Martin Brundle, David Croft, Anthony Davidson, Ted Kravitz and Natalie Pinkham, backed up by the likes of Georgie Thompson, Simon Lazenby and Steve Rider.
The ex-Williams driver will be on air for ten of the season's 20 Grand Prix, including the curtain-raiser in Australia, along with Bahrain, Monaco, Silverstone, Germany, Hungary, Belgium, India, USA and Brazil.
In a statement on the Sky Sports website, F1 executive producer Martin Turner said: "Damon Hill is a British motor racing legend and has incredible Formula One knowledge and insight.
"He will provide our viewers with not just a driver's eye view, but also that of a world champion. There aren't many around and I'm delighted we'll have Damon with us during the season."
Hill, who previously appeared on ITV's F1 coverage in 2007 and 2008, said that the chance to join Sky Sports F1 was too good to miss.
"The plans Sky Sports have for Formula One are very impressive, particularly the dedicated Formula 1 channel and I couldn't resist becoming involved," he said.
"There are so many reasons to be excited about the new season and I can't wait to get started."
Sky Sports F1 will launch in early March, offering exclusive live coverage of the Australian GP beginning on March 16.