Contreras - a central defender - has been capped 67 times for his country and joins Victory after making 17 appearances for Greek club Olympiacos in the 2012-13 Super League campaign.
The now 35-year-old represented Chile at the 2010 World Cup in South Africa, and has also experienced Champions League football with both Olympiacos and PAOK Thessaloniki.
With Daniel Mullen returning to Chinese side Dalian Aerbin after a four-month loan spell with Victory, Postecoglou was ecstatic to add to his defensive options with Adrian Leijer and Nick Ansell the only recognised central defenders.
"We are thrilled to welcome Pablo to Melbourne Victory and there's great excitement around what he can bring to the club," Postecoglou said.
"Pablo is a high quality central defender who will be an important part of our journey towards an A-League Championship, and, hopefully, our upcoming Asian Champions League campaign."
The veteran had been linked with the club for a number of weeks as Victory coach Ange Postecoglou pursued a marquee to replace Argentine Marcos Flores, who left Melbourne for the Central Coast Mariners.
Contreras will have his first training season with Victory on Tuesday and is expected to be available in the squad travelling to Tasmania for the pre-season friendly against Western Sydney Wanderers on September 29.
