Pizarro seals permanent Bremen switch
Pizarro was on loan at Werder last season and helped them win the German Cup and reach the UEFA Cup final in his second stint with the northern side he played for from 1999 to 2001.
His new contract, running to 2012, includes an option for one more year.
"I am very happy we could seal the deal," Werder sports director Klaus Allofs told reporters.
"It has been an issue for months and in the past weeks we intensified our efforts to get Claudio."
The gifted striker formed a formidable partnership with midfielder Diego last season, scoring 17 goals in 26 league games, and will team up with Germany's Mesut Ozil who has filled the void left by the Brazilian's departure to Juventus.
"I am happy to be back as I wanted desperately to return to Werder," Pizarro said.
He joined Chelsea on a free transfer from Bayern Munich in 2007 but scored just twice in 31 matches during his first season with the Premier League club. He had not played for Chelsea this season under new Italian coach Carlo Ancelotti.