Villone, 37, is expected to compete with Sean Henn to be the second southpaw behind Mike Myers on the Yankees' relief staff. He will wear uniform No. 47.
"You'd like to have two lefties, in theory, without question," Yankees general manager Brian Cashman said. "I think that gives you a nice balance in terms of matching up late in the game."
A native of Bergen County, N.J., Villone made a career-high 70 appearances with the Yankees last season, compiling a 3-3 record and a 5.04 ERA in 80 1/3 innings. He walked 51 and struck out 72.
Villone had declined salary arbitration from the club in December, leaving him available to pursue offers as a free agent.
"I'm happy that he is [coming in], because he did such a good job for us last year," Cashman said. "I'd like to see him come in and compete, and I'm glad he's doing so."
Villone likely would have merited more consideration for a guaranteed roster spot if not for repeated second-half struggles in recent seasons.
Villone was exceptional before the All-Star break last season, going 3-1 with a 2.27 ERA in 36 appearances.
However, he appeared to wear down as the season hit the stretch run. Villone's August ERA was 6.04, and he posted a 27.00 mark in nine September appearances.
Over the last three seasons, Villone has compiled a 2.58 ERA before the All-Star break and a 6.23 mark following it.
Since breaking into the Major Leagues in 1995, Villone has compiled a career record of 55-57 over 543 games with the Mariners, Padres, Brewers, Indians, Reds, Rockies, Pirates, Marlins and Yankees.
Bryan Hoch is a reporter for MLB.com. This story was not subject to the approval of Major League Baseball or its clubs.