Having made 137 appearances for the Eagles between 2008-2012, Clyne joined Southampton before moving to Liverpool in July 2015. A loan to AFC Bournemouth followed in 2019.
The former Player of the Season (2010/11) has spent recent weeks training with the first-team squad and played 45 minutes for the Under-23s earlier this month.
Internationally, Clyne made 14 appearances for England, earning his first call-up under Roy Hodgson.
Having put pen to paper, Clyne said: "I’m a London boy, this is where I grew up. I’m back home and all my family and friends are here. It’s surreal being back, enjoying it and hopefully I can just crack on and enjoy my football again."
Crystal Palace Chairman Steve Parish added: "Nathaniel is a fantastic character to have around this squad and we are delighted to secure his services for the upcoming period. He is a first-rate professional, just as he was when I first met him more than a decade ago. His presence and experience will be invaluable."
Stay tuned for Clyne's first interview having rejoined the club exclusively on Palace TV tomorrow!