The 39-year-old became a free agent earlier this month following his exit from Rangers.
The striker had admitted earlier this month that his phone had been 'going mad' with interest since it was confirmed he had left the Scottish club.
The former Tottenham and West Ham ace had attracted interest from other League One sides, including Charlton Athletic and Oxford United.
However, despite all the options presented to him, it was a return to the Stadium of Light that he has opted for.
"I can't stop smiling because this is a special move for me for many reasons. I've had so many messages saying, 'remember when you said you would come back', as I said that I would one day and when I left, I wasn't ready to leave," he said.
"I have a special bond with the fans here and the club is in a fantastic position to get promoted. I want to be a part of more special times here and I'm looking forward to it."
Defoe cemented himself as a club legend during his previous stint in the North East, from scoring against bitter rivals Newcastle United in 2015 to steering the Mackems away from Premier League relegation in 2016.
Sunderland were later relegated to the Championship in 2017, which saw Defoe leave the Stadium of Light for his former club, Bournemouth, after netting 34 goals in 87 appearances.
The Black Cats then went on to suffer a second relegation down to England's third tier the following season and have been unable to escape since.
They currently sit third in the League One table, sitting one point behind Wigan Athletic who are second.
They have signed Defoe despite having no manager, after Lee Johnson was sacked on Sunday night following his side's shock 6-0 defeat against mid-table Bolton Wanderer.
However, whilst the search for a new boss continues, the return of club hero Defoe will undoubtedly provide the League One club with a boost.
Mick McCarthy has been linked with the managerial role but no decision has been made on Johnson's successor.