The 28-year-old striker, who spent three campaigns with the Dons from 2004 - scoring 60 goals in 135 appearances - parted ways with Pompey on Monday.
McLeod has signed an 18-month deal at stadium:mk with the option of a further year.
Dons boss Karl Robinson told the club's official website: "It is great news for the football club and the supporters that Izale has returned to MK Dons.
"We welcome back a more mature Izale with a wealth of experience and I believe he is a much better all-round footballer.
"Izale offers something different to the team, but we all know he is a natural goal scorer and it provides us with strong competition up front."
McLeod began his career at Derby in 2002 and, after a loan spell at Sheffield United, joined the Dons in the summer of 2004.
During his first spell in Milton Keynes, the striker's goalscoring exploits saw him named the League Two player of the year in 2007.
The former England Under-21 international's big-money move came in August that same year when he signed a four-year-deal with Charlton, which at the time brought in a club-record fee for the Dons.
Loan spells at Colchester, Millwall and Peterborough followed before McLeod left the Addicks in July 2010.
He enjoyed two successful seasons at Barnet - scoring 36 goals, before agreeing a non-contract deal with Portsmouth in August. McLeod netted 11 times for Pompey before leaving the club by mutual consent on New Year's Eve.