While financial terms are not yet known, Forsberg could take home around $2 million this year.
Forsberg spent the balance of this season in his native Sweden, working out and testing his right foot.
"We're proud to announce to our fans that Peter Forsberg has decided to come back and play with our franchise where he's enjoyed so much success early in his career," said Avalanche GM Francois Giguere. "His addition should complement our roster and will bring our team to an even higher competitive level."
In 697 career NHL games with Quebec/Colorado, Philadelphia and Nashville, Forsberg has accumulated recording 248 goals and 623 assists for 871 points, along with 678 penalty minutes.
Forsberg was originally drafted sixth-overall by the Flyers in the 1991 Entry Draft.
