The 33-year-old made the move to Sale Sharks in 2008 before this he spent seven years at Cardiff Blues.
The former Wales U21 International, will add experience to the young squad and help guide the current crop of fly-half's.
After signing his contract, Nick Macleod commented: "It's great to be able to come back to Wales for both personal and professional reasons.
"The coaches at the Dragons are assembling a young and exciting squad and I am looking forward to joining the Region. I feel that part of my role next season will be to mentor the youngsters at the Region as well as challenging for a spot on the team sheet.
"I have strong links with the Dragons through many of the players and coaches, so I am looking forward to my return home."
He continued: "Finally I would like to thank everyone at Sale Sharks for the opportunities they have given to me over the past eight years."
Dragons Director of Rugby, Lyn Jones added: "We have made a strong and conscious decision to back our youngsters and their development, and signing someone of Nick's calibre recognises this as he will act as a catalyst for these players.
"Nick will be mentoring the likes of Dorian Jones, Angus O'Brien and Arwel Robson whilst also playing his part in the squad moving forward next season.
"His vast experience and maturity within the Aviva Premiership will be a valuable addition to our current young squad."
Guinness PRO12 Dragons News
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