West Ham announced on their website that Cole, 31, had signed an 18-month contract.
"It is a great move for me," said Cole.
"Coming back here brings back all the memories of the pitches I learnt how to play on. This is where I learnt my trade and I'm happy to have another chance to be here.
"I've always loved West Ham and I hope I can give the club a few memorable seasons."
A product of West Ham's famed academy, Cole burst into the club's first team as a 17-year-old in 1999 and was tipped to become one of the best midfielders of his generation, with many comparing his style to that of Paul Gascoigne.
After West Ham United were relegated in 2003, Cole joined Chelsea and was a regular in Jose Mourinho's 2004/05 title winning team, his performances helping establish him in the England team.
Cole played in Chelsea's 2008 Champions League final defeat by Manchester United but injuries began to take their toll and he fell down the pecking order at Stamford Bridge before moving on a free transfer to Liverpool in 2010.
His Liverpool career, which began with a red card on his Premier League debut for the club, never took off and he was loaned to French club Lille in 2011 - a move that briefly helped Cole rediscover his best form.
On his return to Liverpool Cole had appeared to be part of new manager Brendan Rodgers' plans and he scored in the 3-2 victory over West Ham in the Premier League in December.
Cole, who has 56 England caps, had been reported to be close to a reunion with his former West Ham manager Harry Redknapp at Premier League strugglers Queens Park Rangers but decided to return to his roots.
"I have had 18 months at Liverpool where I haven't played much football and [West Ham manager] Sam [Allardyce] wants to play me," he said.
"I feel like I owe the club a little bit as well because if it wasn't for West Ham I wouldn't be a footballer. This club's great youth-team coaches taught me the trade."
Cole could be involved in West Ham's FA Cup Third Round tie against Manchester United on Saturday.
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