The England under-21 international, a team-mate of Blades goalkeeper Dean Henderson in the national set-up, had been linked with a January move to Glasgow Rangers.
Dowell, 21, has featured twice for Everton this season in the Carabao Cup, but showed his Championship credentials during a successful loan spell at Nottingham Forest last term.
The Ormskirk-born player scored 10 goals in 43 appearances for Forest - with his haul inclyuding the winning goal against the Blades at the City Ground in September 2017 and a hat-trick in the 3-2 success at Hull City in the following month.
On Dowell, who can feature in several positions in midfield and up front and also as a number ten, Blades manager Chris Wilder said: "We tried to sign him in the summer after David (Brooks) went, but the manager wanted him around the first team for the first six months.
"We have kept on with it and been persistent with it and he is a talented footballer who wants to play some games. First of all, he has got to get into our side and he understands that.
"He had a decent season and is a talented player at (England) under-21s level and gives us a balance to the group and competition at the top end of the pitch.
"He had a great loan spell at Nottingham Forest in this division and did very, very well. We are looking for him to do what he did at Forest and a little bit more for us."