Smith made 18 appearances for the Dons on loan from Newcastle last season.
The 31-year-old former Leeds and Manchester United player is available on a free transfer after being released by the Magpies.
"We've had a little chat and it's looking good, me and Smithy get on very well," Dons boss Karl Robinson told MK News.
"But I don't take anything for granted in football because there are so many things that can change people's decisions."
Meanwhile, midfielder Luke Chadwick has undergone successful surgery on the knee injury he sustained towards the end of the season.