The veteran defender, 36, left the Blades to head to Merseyside 12 years ago for a £4m fee – having joined United’s academy as a 15-year-old in 1998.
Jagielka was recently spotted training with Burnley, prompting suggestions that he could be joining the Clarets.
But the former England international, capped 40 times by times by his country, has made a dramatic return to the Steel City – having also been linked with Old Firm duo Celtic and Rangers.
The Manchester-born player made his way through the youth ranks at Bramall Lane before making his first-team debut in May 2000 against Swindon Town in the final match of the 1999–2000 season, while still a trainee.
He was rewarded with a professional contract and signed a three-year deal in January 2001.
In total, he made 287 appearances in all competitions in eight seasons for United, quickly establishing himself as a crowd favourite.
Blades boss Chris Wilder said: “I don’t have to sign players for the fans to pat us on the back, we’re signing Phil because he is a really good footballer and a great character to have around in our first season back in the Premier League.
“He’s got an obvious history with the club which is fantastic but meeting up with him and seeing his desire makes me delighted to see Jags back at home.
“He’s had a fantastic career, he was deserving of his move when we dropped out of the top-flight last time and he went to a fantastic club and played all those games in the Premier League and captained England.
“To have Phil in and around our changing room in one of the most important seasons in our recent history is going to be invaluable.
“He’s come to play, he knows he’s got to earn his place, but I’m buzzing having spent time with him and seen the desire he’s got to succeed at the back end of his career.”
Jagielka has signed a one-year deal and represents the Blades’ second key signing of the week.
The club completed a club record deal to bring in QPR midfielder Luke Freeman on Wednesday, with manager Chris Wilder having several other targets as he bids to boost his squad in preparation for their Premier League return, which begins with an opening-day trip to Bournemouth on August 10.
Former Manchester United and West Ham midfielder Ravel Morrison is also currently training with the club and could travel with the squad for the pre-season training camp in Portugal next week.
Blades players have embarked on some key fitness work and testing this week in preparation for their trip to the continent.
Wilder has professed to being pleased with the condition of his squad, while stressing that they must continue to improve ‘mentally, tactically and physically’ with the big kick-off just over four weeks away.
On the focus this week, Wilder said: “It is a conditioning week. We will ramp it up through pre-season and there are tests along the way. There are different types of tests, in terms of the games.
“They are good tests. We will be looking to improve right the way through pre-season.
“Mentally, tactically and physically, we have got to improve. Physically, the numbers where the Premier League lads are, they’re unbelievable. So that is a big one for us.
“The boys have come back in good shape and rightly so, because they know physically what they have to be at.
“We will sit down with the boys and talk to them about what they see their challenges are, individually. We will drill down into that.”