McCarthy 45, is back at Home Park for a third spell, having led the Pilgrims' attack in two spells, between 1988-1990 and 1998-2001.
In total, he made 176 appearances for the Greens, scoring 48 goals.
In between times, he played for Bradford City, Oldham Athletic and Bristol City and, having joined Exeter City after leaving Argyle a second time, ended with a career record of more than 200 goals from over 600 appearances.
McCarthy had 18 months in charge at Treyew Road before leaving by “mutual consent” following a 7-2 defeat at Stourbridge.
Hodges, another former Argyle favourite, did not have his contract renewed by City at the end of last season because of financial reasons after the club were relegated from Blue Square South.
In his three year spell in charge he guided City to the Southern League premier division title.
The 39-year-old has been looking to get back into management and has applied for the vacant job at Salisbury City.
He has offers to play from higher division clubs but does not want to travel just to play any more.
His signing as a player is quite a coup for the ambitious St Austell club who have already signed former left back Martin Watts from Truro City and keeper Jason Chapman from Falmouth Town.