The 25-year-old is one of the rising stars of Australian cricket, having made his Test debut only last month.
Handscomb scored a hundred on his second Test appearance a fortnight ago, and he is also a talented one-day player.
He could be available for the whole season, with Australia having no scheduled Test commitments during the English summer apart from a possible tour to Bangladesh in August, which has yet to receive the go-ahead.
Andrew Gale, who was appointed as Yorkshire first team coach last month, said the club had been tracking Handscomb for some time.
“Peter is someone that we have had our eye on for a while,” said Gale.
“We looked at him as an option for last season, but the schedules didn’t quite work out.
“Since then, he has gone from strength to strength, breaking into the Australian team and scoring his first Test hundred.
“We are getting a guy who is on the up.
“He is young and wants to prove himself on the biggest stage, which will be good for us in county cricket.”
Handscomb, who plays for his state cricket for Victoria and who represents Melbourne Stars in the Big Bash League, has been batting at number five for Australia, but he could bat higher for Yorkshire.
“Number three is where he might slot into in county cricket, but that is yet to be decided,” said Gale.
“He gives us another option with the gloves as well as he keeps wicket in the shorter forms for Victoria.
“The good thing is that he is a good player in all formats, which suits us well given that he will be available for most of the season.”
Martyn Moxon, Yorkshire’s director of cricket, is equally enthused by Handscomb’s capture.
“We are delighted to secure Peter’s signature for the 2017 season,” he said.
“Peter is a player that we have been aware of for a couple of years now, and he has made an excellent start to his Test career.
“We look forward to welcoming him to Headingley and hope that he enjoys playing his cricket for Yorkshire next year.”
Handscomb, who was born in Melbourne, has previous experience of county cricket.
He represented Gloucestershire as an overseas player last summer, scoring 401 runs in six County Championship matches at an average of 44.
Handscomb has taken his game to another level this winter, scoring a career-best 215 for Victoria in the Sheffield Shield, which helped to earn him his Test debut against South Africa in Adelaide.
Handscomb scored an unbeaten 54 in the first innings of that match and then hit the winning run in the second innings as Australia won by seven wickets, ending a wretched run of results that had brought about a selection reshuffle.
Handscomb followed up with 105 and 35 not out in a 39-run victory over Pakistan in the opening Test at Brisbane earlier this month, and he scored 54 in the first innings of the second Test in Melbourne that finishes today.