The Republic of Ireland U21 international full-back had his Forest contract terminated by mutual consent, allowing him to rejoin his former boss Sean O'Driscoll at Ashton Gate.
The 24-year-old has signed a two-and-a-half-year contract and will go straight into O'Driscoll's squad for Saturday's home clash with Ipswich.
After completing his first signing as City manager, O'Driscoll said: "He can play right-back, left-back and centre half and is the right age. He has played a lot of games in the Championship and has never let me down.
"Financially, he fits in with what the club want to do in the future and he is reliable and solid as a character.
"He has been at a club where he has not had enough games because they have always had the ability to buy someone more expensive. If they sign someone who is more expensive, they usually play ahead of you.
"He's a great character to have around and will fit in really well here at Bristol City."
Moloney made 49 appearances for Forest after making his debut in 2007, while he also had loan spells with Chesterfield, Rushden & Diamonds, Notts County and Scunthorpe.