The veteran 40-year-old helped Ian Holloway's team clinch promotion to the Premier League last season and will make a return to the top flight after a two-year absence
The veteran striker, who turns 40 next week, scored the winning goal in the club's play-off final against Watford at Wembley in May.
Phillips, who last featured in the top flight for Birmingham in the 2010-11 campaign, will now get another shot at Premier League football.
"I am absolutely delighted, I loved my time here at the end of last season and was always hoping to have another chance to play in the top flight," he told the club's official website.
"It's unbelievable for me but I am really looking forward to it and hoping I can play a great part in the season ahead.
"Everyone I spoke to said to keep going as long as the fitness and hunger is there and that is certainly the case with me."
Phillips will join up with the Palace squad for Saturday's pre-season friendly against Dagenham and Redbridge.