"The full-back arrives as a free agent and signs on until June 30, 2029," said Barca in a statement.
Portugal international Cancelo terminated his contract with Saudi Arabian side Al Hilal in order to return to Camp Nou.
The 32-year-old has previously spent two loan spells with Barca, including in the second half of last season, helping Hansi Flick's side retain LaLiga.
Cancelo played in Portugal, Spain and Italy before joining Manchester City in 2019.
The defender was loaned to Bayern Munich and then Barcelona in the 2023/24 campaign before joining Al Hilal in 2024.
Cancelo follows Rodri, Anthony Gordon and Karim Adeyemi to Barca this summer, with the Catalan giants still looking to sign a striker after the departures of Robert Lewandowski and Ferran Torres.
Barca were hoping to sign Atletico Madrid's Julian Alvarez but have to look elsewhere with the Rojiblancos refusing to let the Argentina international move.
Flick's team begin their LaLiga campaign on Sunday at Elche.
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