The 25-year old spent the majority of the last campaign on loan at the Blues, making 28 appearances as they secured a 12th-place Championship finish.
Caddis returned to his parent club, Swindon, at the end of last season and Birmingham manager Lee Clark spoke of his joy at being able to secure his services on a three-year deal.
"I'm delighted to bring Paul back to the club. He's obviously a player that we know very well and certainly not a gamble as he did the business for us last season," Clark told Birmingham's official website.
The move comes in the wake of scans revealing that full-back Neil Eardley would be ruled out for a number of months with knee ligament damage, something which made the deal even more crucial for Clark.
"With Neal Eardley's situation it was important that we brought in another defender and, to add to that, Paul is a specialist right-back," he said.
"When Neal returns we are going to have ourselves two very experienced right-backs."
Meanwhile, the Championship outfit announced that 19-year old French midfielder Eddy Gnahore has left the club by mutual consent.