Taylor, who joined Town from Posh for an undisclosed fee in August 2012, returns to London Road on a deal until November 2 as cover for Lee Tomlin, who suffered ankle ligament damage during Peterborough's Capital One Cup defeat at Sunderland in midweek.
"I had a conversation with the chairman on Wednesday afternoon," said Posh boss Darren Ferguson. "We were aware that Lee had his scan in the evening and that we were getting the results on Thursday morning.
"He suggested Paul Taylor and I have to be honest, I didn't think of him because I didn't think we could do a deal. However, Ipswich have allowed him to come out and get games so I thank Mick McCarthy for making the deal happen.
"I was quite happy to go with what I had, but when it became clear we could get him, I couldn't turn that opportunity down. Paul is a very good player and that is why he got the move he did.
"When you get player on-loan, it sometimes takes quite a long time to settle and get to know everyone, but Paul knows the place and the lads. He knows how we want to play, which is the important thing.
"He can play two or three different positions and I think it is a very good signing for us, there is no question about that. I am glad that I had the conversation with the chairman."
Taylor made his return to first-team action this season from a lengthy spell on the sidelines with a foot injury.
He has started one game for Ipswich, the Capital One Cup defeat to Stevenage, but has been used regularly from the bench by Town manager McCarthy.
The loan will enable the Liverpool-born striker to get further first-team action under his belt and the move also allows the 25-year-old to play for Posh in the Johnstone's Paint Trophy.
Ipswich have the option to recall Taylor after 28 days of the loan.