The Scotland international left the Toffees three years ago for St Andrews, but has been without a club since leaving Blues this summer.
He had trained with Wolves and both Mick McCarthy's side and Celtic were keen on signing the 28-year-old, but he opted to link up again with David Moyes on Merseyside in the hope of resurrecting a career hit by injury.
Everton have signed the McFadden on a free transfer until the end of the season.
McFadden originally joined the Blues from Motherwell in 2003 and scored 11 times in 109 appearances.
After moving to the midlands for £5million the Scot scored 13 times in 82 games until a cruciate knee ligament injury curtailed his involvement last season.