Shevchenko, 32, Ukraine's most famous player and at his peak one of the deadliest strikers in the world, put two difficult years behind him and told reporters at a news conference: "I am truly very happy to have returned to my home club.
"I have spent 10 years of my life in various European countries - at Milan and Chelsea - and the time came to return."
He was told he could leave Chelsea last week and moved swiftly to secure a two-year deal with Dynamo.
Voted Ukrainian Footballer of the Year six times, Shevchenko had a superb first spell at Dynamo, scoring 60 goals in 116 league games which secured him a move to AC Milan in 1999.
He scored 127 goals in 226 Serie A appearances at the San Siro where he was voted European Footballer of the Year in 2004, and he won the Champions League in 2003 with Milan.
However a move to Chelsea never worked out in 2007-08 and he spent last season back on loan at Milan.
Shevchenko, who has scored a national record 41 goals in 87 appearances for Ukraine, believes Dynamo can mount a challenge in this season's Champions League and he will return to the San Siro in October when they play Italian champions Inter Milan there in the group stage.
Dynamo also face European champions Barcelona and Russian champions Rubin Kazan. "We have to do some serious work now," Shevchenko said. "We are in a very, very good group, a very strong group. And the stronger it is the better it is for us, I think.
"The team is ready and we can play very well in the Champions League and may God give us success."
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