Shorey, 31, was voted the greatest left-back in the club's history and earned international honours with England after helping Reading to win promotion in 2006 and then stay in the Premier League for the 2007-08 season.
After making 286 appearances for Reading he left the club for Aston Villa following relegation back to the Championship in 2008, but the Royals' return to the Premier League this summer has paved the way for his own return to the Madejski Stadium.
An option exists to extend Shorey's new contract by a year.
"I would like to welcome Nicky back to Reading Football Club," chairman John Madejski told the club's official website.
"He was an outstanding player here once before and we are looking forward to him triumphing even more this time around.
"I know the manager was very keen to have Nicky back. That makes a huge difference and so good luck to him once again."
Shorey spent loan spells with Nottingham Forest and Fulham after joining Villa and this summer was a free agent following his release by West Brom, who he joined in a £1.3 million deal in July 2010.