The Danish supermarket, which left the UK in 2010, will open 15 stores in the next year in a deal funded by Netto owner Dansk Supermarked and Sainsbury's.
Sainsbury's said the move allows it to enter the fast-growing discount sector, worth an estimated £10 billion a year, without diluting the established reputation it has built up at its supermarkets, convenience stores and online.
The big four supermarkets - Sainsbury's, Morissons, Asda and Tesco - are in the middle of a price war as their market shares are squeezed between discount retailers such as Aldi and Lidl and upmarket rival Waitrose.
Tesco, Sainsbury's and Morrisons - all saw their market shares slip in the 12 weeks to May 25, compared to a year ago, according to till-roll figures from Kantar Worldpanel.
But Lidl hit a record market share of 3.6% driven by its highest ever year-on-year growth of 22.7%. Rival Aldi grew 35.9% over the year and retained its record 4.7% market share.
Sainsbury's and Dansk Supermarked will both plough £12.5 million into the new Netto operation, and each partner expects to book a post-tax loss of between £5 million and £10 million up to March 31, 2015.
The first new Netto store will open in the North of England and will sell a range of fresh food as well as incorporate an in-house bakery.
Mike Coupe, Sainsbury's chief executive designate who takes over from long-serving boss Justin King next month, said: "This joint venture provides a great opportunity for us to gain exposure to the high-growth discount market for the first time in partnership with Dansk Supermarked, whose expertise and values are a strong complement to our own."
When Netto left the UK market five years ago it sold its 198 stores to Asda. The business was first established in the UK in 1990.
The new stores will sell 2,000 products, similar to Aldl and Lidl and up from the 600 stocked at the time of Netto's sale.