The 37-year-old spent a brief spell at Old Trafford during 2010 and will be available for the entire County Championship season as Lancashire bid for a return to Division One.
Katich, who has previously played for Durham, Yorkshire, Derbyshire and Hampshire, made his Test debut for Australia against England in 2001, making a total of 56 Test appearances for his country.
In an official club statement, the left-hander said: "I'm delighted to be returning to Lancashire after a short stint there in 2010.
"Firstly, I'd like to thank everyone at Hampshire Cricket for all they have done for me. I leave with many great friends and fond memories.
"Lancashire are a proud club who I'm sure will be looking to head straight back up to Division One and I'm determined to play a big part in this happening.
"I enjoyed working with Peter Moores and Glen Chapple in 2010. Their professionalism and attention to detail was particularly impressive and I'm hopeful that with my experience, I can be a senior member of the squad and help a relatively young group in having a successful season in all forms of the game."
Cricket director Mike Watkinson added: "Simon is a quality performer and a top character.
"He knows our club and county cricket very well and has enjoyed an outstanding career, averaging over 50 in first-class cricket.
"Naturally, we are delighted to welcome him back to Old Trafford."