The 34-year-old looked certain to join Heart earlier this week after being released by United Arab Emirates club Al Wasl a fortnight ago.
But a late bid by the Sky Blues swayed the veteran Sydney-born and raised defender to renew his ties with coach Frank Farina, who on Thursday re-signed through to the end of the 2014-15 season.
"I'm a Sydney boy and I'm excited to be coming back to Australia to play club football in front of friends and family with Sydney FC," said Neill in a statement.
"I worked with Frank for many years in the Socceroos and I look back on those times with good memories, and it's great to have the chance to enjoy further success together at Sydney FC."
Neill can look forward to a hostile reception in Melbourne next Sunday when he is likely to be cleared to play his first A-League match against the John Aloisi-coached Heart.
It is a timely boost for Sydney FC, who sit on the edge of the top six with seven matches remaining before the finals.
Neill will line up alongside Italian superstar striker Alessandro Del Piero and Socceroos teammate Brett Emerton to add plenty of experience to an otherwise youthful squad.
Capped by Australia 89 times, it is understood Neill has been told by Socceroos coach Holger Osieck he must be playing regularly to be guaranteed a starting spot for crucial upcoming World Cup qualifying matches.