The Republic of Ireland forward, who was out of contract at Celtic this summer, has agreed a two-year deal.
Murphy has spent the past two seasons on loan at Portman Road from Celtic, where he started just nine times in three years.
And the move reunites him permanently with Mick McCarthy, the manager who brought him to England from Waterford when he was in charge at Sunderland.
"I'm delighted to be back," Murphy told the Ipswich website.
"I had a chat with the manager at the end of the season and I'm pleased to get the deal done and finally be an Ipswich player on a permanent basis.
"It's well documented that I love being at Ipswich and I made no secret that I wanted to return. The fans have been great with me every time I've been here and I think the club is really heading in the right direction."
The 30-year-old is Town's third close-season signing following the arrivals of Jay Tabb and Cole Skuse.