The 51-year-old had been employed as the club's head of player recruitment and has returned to management for the first time since resigning from Ross County in February 2011.
The former Celtic reserve team coach has replaced Mick Wadsworth, the former Gretna manager, who stepped down after just 10 matches. Celtic Nation have shown remarkable ambition despite playing in Northern League Division One and the Carlisle club signed Colin McMenamin and Willie Gibson in the summer, two players who once played in the top flight in Scotland.
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The appointment of McStay would appear to be a simmilar signal of intent from the ambitious team. A statement read: "The club feels extremely fortunate to have filled the managerial position with somebody of Willie's experience, contacts and knowledge of football. The club is confident and optimistic that Willie will enjoy much success and we look forward to the rest of the season with great anticipation."