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Arlidge has been coaching at club level in the region for the past 20 years and has been involved in the elite men's programme for the past two seasons.
The Magic stalwart takes over the reins from American coach Don Sims, who led the Nuggets in 2008.
Arlidge expressed frustration earlier this year when Basketball New Zealand canned the Conference Basketball League, essentially leaving the Otago side without a tournament in which to play.
He will lead the senior side on a tour to Australia in December, and he said he was excited at the prospect of coaching in the NBL.
"I'm really looking forward to the challenge of putting a competitive team on the floor," Arlidge said in a press release.
"Otago has a long and proud history of achievement at the national level and to be given this opportunity is fantastic.
"Otago has a lot of young talent and, combined with some recruited players from outside of the region, I believe that we have the opportunity to further increase the enthusiasm for the game here and deliver on our potential."
Arlidge said the Nuggets were negotiating with players, including imports, and the trip to Melbourne in December "will be great preparation" leading into the 2010 season.
The NBL schedule is still being finalised but the Nuggets will have 10 home games and are considering playing a pre-season game in Oamaru in February.
Former Nuggets coach and Basketball Otago board member Todd Marshall said Arlidge had the qualities to succeed at the next level.
"Alf is one of our top coaches, having secured three senior men's titles over the last four seasons," Marshall said.
"Alf deserves this opportunity and we wish him well."
Basketball Otago opted against entering a team this year but made a successful bid to re-enter the league next season.
Last month, the Nuggets announced a major naming sponsor, and their decision to appoint a Dunedin-based coach is an indication the franchise intends to pick from local talent where possible.
That is a shift from recent policy; the last three Nuggets coaches were from overseas.
Australian Rick Castle achieved just five wins in 36 matches from 2006-07, and the Sims-led Nuggets won just two of their 18 matches.
German coach Bernd Kupka had the same record, with two wins from 18 in 2005. The bar, it is fair to say, has not been set very high.
Arlidge could not be reached for comment yesterday.