The 33-year-old former Scotland international, manager Micky Mellon's seventh summer signing, was transfer listed by North End at the end of last season despite making 30 league appearances during the 2011/12 campaign.
"I'm absolutely delighted to bring in someone with the experience of Barry Nicholson," Mellon told the club's oficial website.
"He provides options different to those we already have in the squad and that will be important in our first Football League campaign.
"You can never have enough good players and I'm delighted to have him on board."
Nicholson won three caps for Scotland between 2001 and 2004, during his time at Dunfermline.