Sixers president Ed Stefanski announced the signing Wednesday on the team's Web site. Iverson is expected to make his debut Monday at home against the Denver Nuggets.
"In light of the recent injury to Lou Williams, which will sideline him for close to eight weeks, we felt that Allen was the best available free agent guard to help us at this time," Stefanski said in a release.
Williams, who averaged 17.4 points and 5.1 assists, broke his jaw in Philadelphia's loss to Washington on Nov. 24.
Iverson, his agent and business manager met with Stefanski, coach Eddie Jordan and two other members of the organization Monday.
The 34-year-old Iverson announced his retirement last week after an ill-fated stint with the Memphis Grizzlies. The 10-time All-Star was NBA MVP in 2001 when he led the Sixers to the NBA finals.
Iverson was offered a one-year, non-guaranteed contract on Tuesday, according to a person who spoke to The Associated Press on condition of anonymity because the contract talks had not been made public.
The Sixers would owe just under $650,000 if they guarantee his contract for the remainder of the season on Jan. 10. Stefanski plans to talk about Iverson's return in a noon teleconference.
In 10 seasons with the Sixers, Iverson posted the highest scoring average in team history (28.1), was second on the points list (19,583) and holds the record for 3-pointers (877). He was a seven-time All-Star, won four scoring titles and two All-Star game MVPs.
The Sixers (5-13) have lost seven straight entering Wednesday night's game at Oklahoma City and need Iverson to spark sagging ticket sales and their playoff chances.
This reconciliation was once thought foolish after their acrimonious split three years ago. Iverson's last game with Philadelphia was Dec. 6, 2006 in Chicago. He refused to play the fourth quarter and was banished from the team two days later. He was eventually traded to Denver as part of the Andre Miller deal, and bounced to Detroit before landing in Memphis.
The 6-foot Iverson played three games this season with Memphis before taking a leave of absence to attend to personal matters. He was waived after the two sides agreed to part ways.
The New York Knicks considered signing Iverson after he cleared waivers, before deciding he would take too much playing time from younger players they are trying to develop.
He will likely start for the Sixers with Williams out. Iverson's refusal to come off the bench ended his time in Detroit and Memphis on a sour note.
Iverson would get another look at his former teams after playing Denver. The Sixers, who have not won a playoff series since 2003, play at home Dec. 9 against Detroit.
Iverson was the No. 1 overall pick in the 1996 draft, but his 10 turbulent seasons in Philadelphia were marred by his rants about practice, run-ins with former coach Larry Brown, arrests, and a failed rap career.
Iverson often arrived late for practices or missed them entirely. In one infamous blowup at the end of the 2002 season, he repeated the word "practice" nearly 20 times during a rambling monologue.
Iverson has career averages of 27 points and 6.2 points in 889 career games in 14 seasons. He is tied for the fifth-highest scoring average in NBA history and ranks third among active players.
Iverson has played in 71 career playoff games and owns the second-highest postseason scoring average (29.7 ppg) in NBA history, trailing only Michael Jordan (33.4 ppg).