The 29-year-old midfielder was a free agent after leaving Middlesbrough earlier this summer.
Bailey, who cost Boro £1.4million when he joined from Charlton three years ago, is new Lions boss Steve Lomas' sixth summer signing following the arrivals of Stephen Bywater, Jermaine Easter, Lee Martin, Steve Morison and Richard Chaplow.
He told Millwall's website: "I believe that with the new players coming in added to those who did well in the early part of last season, we can be a force in the Championship.
"I'm looking forward to a new start at Millwall, and ideally scoring more goals from midfield than I had the opportunity to do at Boro.
"The fans at The Den are very passionate about their football, and I hope they will see in me a player who gives 100 per cent to the cause every time I pull on the shirt."