The 30-year-old, who began his career at Fir Park, has agreed a one-year contract with the club.
Having spent a decade south of the border with two spells at Everton, Birmingham and Sunderland, McFadden returned to Motherwell in February on a short-term deal and scored five goals in 13 appearances.
He is Motherwell's seventh signing of the summer following the arrival of Paul Lawson, Iain Vigurs, John Sutton, Fraser Kerr, Gunnar Nielsen and Stephen McManus.
McFadden, who has been capped 48 times by Scotland, told MFC TV: "I am really pleased to have it all sorted.
"When the manager asked me to go to Spain, I made up my mind then that I was going to come back and I am really looking forward to the season ahead.
"My relationship with the supporters and how they are with me certainly played a part in my decision.
"It's familiar surroundings; obviously I really enjoyed it last season, I hope the fans will be happy and I am happy to get it all done."
Chief executive Leeann Dempster added: "Obviously we are thrilled and delighted to have James on board again.
"He is an iconic figure amongst our supporters and made a significant contribution at a vital time last season.
"The board have been very pleased with how the summer recruitment plan has gone thus far and are still hopeful of adding some more new faces in the near future."