The 26-year-old came through a medical this morning and is set to be unveiled to the press on Friday.
"I'm delighted to come back to City and I just can't wait to get started again, he told the City website.
Shaun never managed to hold down a regular first-team spot at Chelsea, which cost him a place in England's 2006 World Cup squad.
We are all now hoping he can rediscover the sparkling form that first saw him burst onto the international scene while at City.
And that is an exciting prospect with City now having left-winger Martin Petrov operating so effectively down the opposite flank.
"I've always admired him and he's certainly been a target of mine since I came to the football club," added new Blues boss Mark Hughes.
"To actually secure the deal and bring Shaun back home is a fantastic coup for us, and I'm sure the supporters will be just as excited as we are to have him back at Manchester City."