The 59-year-old Spaniard captained the Europeans to their celebrated come-from-behind victory at the 2012 Ryder Cup in the US, the so-called 'Miracle of Medinah'.
That marked the last time Europe won the biennial competition on American soil.
This year's event is being held from September 26-28 at Bethpage Black in New York.
"It's really hard to win away from home in the United States. In New York, we know the crowds are going to be very loud and the golf course will be set up in favour of the US team," Olazabal said.Â
"There is not any bigger challenge for a golfer than facing a Ryder Cup away from home and we have to be mentally prepared."
This will be Olazabal's fifth time as a vice-captain, including two years ago when Team Europe won in Italy. He also held that role in 2008, 2010 and 2014.
Donald previously named Denmark's Thomas Bjorn and Italy's Edoardo Molinari as vice-captains.
Olazabal, a two-time Masters champion, played in the Ryder Cup seven times from 1987 to 2006.
"He is synonymous with European golf and the Ryder Cup," Donald said. "He bleeds blue and gold like nobody else. His passion for the Ryder Cup is second to none."
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