The midfielder returns to Stade Gerland a little over a decade since his departure, ending a year-long absence from football after a failed spell at Saint-Etienne last season
The 32-year-old signed for Saint-Etienne at the start of last season, but made only one appearance before agreeing to mutually terminate his contract with the club.
On Monday, Malbranque was unveiled alongside president Jean-Michel Aulas, special advisor Bernard Lacombe and his new boss Remi Garde.
"I'm glad to have him back," said the supremo at the unveiling ceremony. "He is a product of our youth academy.
"That carries, with [the transfer], real value."
Lyon were recently dealt with lengthy injury lay-off to playmaker Yoann Gourcuff, and have acted quickly in securing the former Tottenham and Fulham ace.
Malbranque returns to his former youth club after spending more than a decade away from Les Gones, including a 10-year stint in the Premier League.