The 34-year-old Swedish superstar has been suffering from foot and ankle injuries which kept him out of action for the past year.
The former league MVP has been rehabilitating in his native Sweden but also hinted at possibly sitting out the entire season.
“Over the last several months, I have worked extremely hard in order for this to be possible,” Forsberg said. “I am looking forward to putting this jersey on again.
“I have so many great memories of my playing days in Denver. I’m excited about helping my new teammates and former teammates in the coming weeks, and hopefully I am able to do that in the very near future.”
The deal comes one day before the deadline that allows Forsberg to be eligible for playoffs. The veteran centre is fourth on the franchise list with 741 points and holds the club mark for most playoff assists with 97.
Forsberg also is second in franchise history in both goals (57) and points (154) in the postseason.
“We’re proud to announce to our fans that Peter Forsberg has decided to come back and play with our franchise,” Avalanche general manager Francois Giguere said.
“His addition should complement our roster and will bring our team to an even higher competitive level.”
The addition of Forsberg is an added boost to Colorado, which welcomed back Joe Sakic on Sunday after the captain missed 38 games due to a hernia.
Forsberg split the 2006-07 regular season between Philadelphia and Nashville, recording 13 goals and 42 assists in 57 games.
The five-time All-Star has not appeared in more than 60 contests since 2002-03 due to various ailments.
The sixth overall pick by Philadelphia in 1991, Forsberg did not play a game with the Flyers after being drafted, as he was part of the package sent to the Quebec Nordiques for Eric Lindros in June 1992.
After winning the Calder Trophy (top rookie) in his lone season in Quebec in 1994-95, Forsberg followed the franchise to Denver, where he helped the Avalanche to a pair of Stanley Cup titles in nine seasons.
‘A two-time Olympic gold-medal winner, Forsberg signed with Philadelphia as a free agent in August 2005 and registered 75 points in 60 games the following season.
He was traded to Nashville on February 2007 and notched two goals and 13 assists in 17 contests with the Predators before adding two tallies and four points in five playoff games.