The 31-year-old played an integral part in Motherwell’s successful fight for Premiership survival last season having joined in January following his release by Millwall.
McDonald told the club website: “I’m delighted it’s been sorted as there had been a bit of speculation.
“I have nothing but good memories from my time at Motherwell and the warmth from this football club and what it gives me, and vice-versa, was a big attraction for me coming back. I really enjoyed the end of last season and am hoping for some success here this season.”
Manager Ian Baraclough said: “He carries a threat – that was proven in the last few months of the season – but we also think he can help assist in the development of other strikers at the club too.
“He’s also the type of player who will demand from himself and others around him and that’s something I see as a huge benefit.”
McDonald, who played for the Fir Park side from 2004-2007 before joining Celtic, scored five goals in 13 games last season.