Vastly experienced forward Lydiate – recently named in the preliminary Rugby World Cup squad for Wales – will return to his first professional club and Rodney Parade this summer.
Lydiate previously played 85 times for the Men of Gwent between 2006 and 2013 – captaining the club on a number of occasions.
The hugely talented and ambitious 35-year-old – who stands 6ft 4in and weighs 18st 1lbs – has won 69 caps for Wales during a glittering career and featured in the 2011 and 2015 Rugby World Cups.
Among his many accolades the flanker was named Six Nations Player of the Championship in 2012 and the Welsh Rugby Writers’ Player of the Year that same season.
Lydiate – who has had playing spells at Racing 92 and Ospreys – was part of the British & Irish Lions squad that toured Australia in 2013, featuring in all three Tests as the Lions claimed a 2-1 series victory.
Head Coach Dai Flanagan said: “We’re delighted that Dan is coming home to a club where it all started and a place that means a huge amount to him.
“Dan has enjoyed a fantastic career, playing at the very highest level, and he comes back to Dragons producing some of his finest rugby, underlined by his recent call-up by Wales.
“Dan remains hugely ambitious and still wants to achieve in rugby and be a huge asset to us.
“He is a leader, someone who sets the standards, while his vast experience and approach to the game will be of huge benefit to our young squad.
“We’re excited that Dan is a Dragon again and from speaking to him I know just how much he is looking forward to pulling that jersey back on and representing the Men of Gwent.”
Lydiate said: “It’s great to be back. I have a lot of fond memories of my time here and I’m determined to add to that on my return.
“I’ve had a lot of positive conversations with Dai about what is being built here and he is one of the reasons I wanted to return and sign.
“There is a good crop of young talent at Dragons and now I’m back on board I will hopefully add some experience, play my part, and help them on their journey too.
“I’m looking to getting stuck in. There is no better crowd than Rodney Parade when it’s packed out and I can’t wait to represent the club again.”
