The 29-year-old spent the second half of last season on loan at Vicente Calderon after impressing in his first spell at the club in the Europa League-winning campaign in 2011-12.
However, following a lengthy spell of negotiations, the Brazilian has now signed a three-year deal with the Istanbul outfit at a reported salary of £2.8 million (€3.5m) per year after neither Atletico nor Wolfsburg opted to extend his deal.
"I am very happy to be here. This dream finally came true," he told reporters.
"There had been contacts with Fenerbahce for several years.
"I came to a winning club and I will continue to win. I want to show my ability. I talked to my friends about Fenerbahce and I am aware of the greatness of this club."
Diego spent the latter half of the 2013-14 season on loan at Atletico, where he played a role in leading the club to a Liga title and a runners-up spot in the Champions League following his incredible long-range strike against Barcelona at Camp Nou.