The 29-year-old has signed a contract until the end of the season.
The Scotland forward, who scored 32 goals for the club as a teenager before a £1.25million move to Everton, had been training with the Clydesdale Bank Premier League club after leaving Sunderland last month.
The reaction to the hotly-anticipated news saw the Motherwell website crash immediately after the club announced the signing.
Manager Stuart McCall had earlier tried to dampen expectations over the return of the fans' hero, insisting he had not held discussions with the player but would do so after tomorrow's Clydesdale Bank Premier League clash with Dundee United at Fir Park.
However, the club were privately confident of signing McFadden following talks last week and they sealed the deal after their pre-match media conference.
McFadden could now make his competitive return in a claret and amber jersey tomorrow night as Motherwell aim to extend their two-point lead in second place in the Clydesdale Bank Premier League when Dundee United visit Fir Park.
The forward has only made 11 appearances, mostly off the bench, in short-term spells as Everton and Sunderland since suffering a damaged cruciate ligament while at Birmingham in September 2010, not long after his most recent international appearance against Liechtenstein.
But McFadden, who saw a move to Nottingham Forest fall through earlier this month when Alex McLeish left as manager, believes he is as fit as can be and is looking to reach peak sharpness and form at the club where he made his name.
McFadden, who made his Fir Park debut as a 17-year-old, told MFCTV: "It's great. I obviously had a good time the first time and I need to get back playing football and this is probably the best place for me at the moment.
"I can't wait. Obviously the team have been doing well this season and I'm hoping I can add something and get some games under my belt and put my injury worries behind me."
The fans' favourite held talks with Motherwell earlier in the season, but could not agree a deal and signed for Sunderland.
However, the move made sense after returning to the club for a second training stint after failing to make a major impact at the Stadium of Light.
"It's been difficult," he said. "I was out for over a year with my injury and it took me a wee while, even when I was fit and training, to get back to a level I was happy with.
"I never really managed to get a run of games to get back to my best.
"This is the perfect opportunity for me to do that and hopefully I can do that in the next couple of weeks."
McFadden has scored 15 goals in 48 appearances for Scotland, including the memorable winner against France in Paris in 2007, after making his international debut while a Motherwell player.
And he is determined to resume his career for his country under the tutelage of Motherwell manager Stuart McCall, who is one of national team boss Gordon Strachan's assistants.
"The last wee while people have been questioning my fitness and my ability to play games and get back to the level I was at," he said.
"Hopefully this is the springboard for me to get a good run of games and let people see I'm fine and over my injury and ready to play.
"Obviously I'd love to play for Scotland again."
Motherwell manager Stuart McCall had earlier insisted he had not held talks with the player and would speak to him after the United game given the "euphoria" surrounding speculation over his potential return.
But the club were privately confident of making the return happen and sealed the deal after McCall's pre-match media conference.
And, given McFadden has been training with Motherwell for a fortnight, he is likely to start on the bench tomorrow night as the Lanarkshire side look to build on their 3-0 victory over Inverness.
"I'm as fit as I can be from training," he said. "I'm lacking a bit of match-fitness and sharpness but the only way you get that is by playing games.
"I'm ready whenever needed."