After retiring as a player, he managed the minor league New Orleans Pelicans and Charleston Senators before returning to the Pirates as a coach (1956 through August 4, 1957). He then succeeded Bobby Bragan as manager and would hold the job for all or parts of 15 seasons over four different terms (1957–64, 1967, 1970–71, 1973–76). Murtaugh guided the team to two World Series championships (1960, 1971) and four Eastern Division titles (1970–71, 1974–75). He first retired after the 1964 season citing health problems, moving up to the Pirate front office evaluating players for general manager Joe L. Brown. However, when his immediate successor as manager, Harry Walker, was fired during the 1967 season, Murtaugh returned as interim manager for the remainder of the season, after which he returned to the front office.
Well aware of the abundance of talent in the system, Murtaugh asked to reclaim the managing job after Larry Shepard was fired in the last week of the 1969 season. Once medically cleared, he became manager once again. (Only hours after this re-hiring on October 9, Don Hoak, his third baseman on the 1960 world champion Pirates and a manager in the Pirates' farm system in 1969, died of a heart attack after believing he was a leading contender to manage the parent club.) He stepped down after the 1971 championship season and his hand-picked successor, Bill Virdon (center fielder for his 1960 world champions), took over. When Brown fired Virdon in September of 1973, Murtaugh reluctantly returned to managing and stayed through the 1976 season, both he and Brown announcing their retirements during the final week of that season.
On September 1, 1971, Murtaugh was the first manager in major league baseball history to field a starting lineup consisting of nine black players (African Americans and dark-skinned Latinos). The Pirates beat the Phillies 10-7 in that game.
As a manager, he compiled a 1,115-950 record in 2068 games (.540), second in Pirates history behind only Fred Clarke.
Murtaugh died in his hometown of a stroke at age 59, two months after retiring. His number 40 was retired by the Pirates on April 7, 1977.