The 26-year-old told City's official website: "Obviously I'm delighted to come back to City and I just can't wait to get started again."
The winger left City for Stamford Bridge in July 2005, for a fee of £21million. City boss Mark Hughes said: "I've always admired him and he's certainly been a target of mine since I came to the football club.
"To actually secure the deal and bring Shaun back home is a fantastic coup for us and I'm sure the supporters will be just as excited as we are to have him back at Manchester City."