Phelps, 28, spent last season in the Tigers' system, hitting .303 with 24 home runs and 90 RBIs in 126 games for Triple-A Toledo.
"For $50,000, I thought it was worth the free look to see what he can do," general manager Brian Cashman said. "He can compete with Andy Phillips, and if we don't do anything else at this position, I'll be comfortable going to camp this way."
The Yankees are very familiar with Phelps, both from watching him in the International League last season and from his time with the Blue Jays and Devil Rays at the big-league level.
From 2000-05, Phelps played in 352 games for Toronto, Cleveland and Tampa Bay, hitting .268 with 57 home runs and 212 RBIs. His best season came in 2002, when he hit .309 with 15 homers and 58 RBIs in 74 games for Toronto. The next year, he played 119 games for the Jays, batting .268 with 20 homers and 66 RBIs.
Phelps' selection marked the first time the Yankees took a player in the Rule 5 Draft since 1995. That year, New York selected catcher Marc Ronan from Milwaukee, as Joe Torre had managed him in St. Louis. The Yankees released him at the end of Spring Training in 1996.
The Yankees also lost a player in the Minor League portion of the Rule 5 Draft on Thursday, as the Phillies selected Victor Hall, an outfielder from Double-A Trenton.
Mark Feinsand is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.