Versatile back O'Connor, 29, was released from his contract with English club Sale Sharks earlier this month, in order to pursue his ambitions of representing the Wallabies at the World Cup in Japan later this year.
He has now returned to Queensland, where he spent a solitary season in 2015, eager to demonstrate how he has matured after off-field troubles marred his previous time in Australia, which included stints with the Western Force and the Rebels.
"I'm a Queenslander. I was born there. I started playing rugby there. It's where the dream began. I think a big part as well is that I owe Queensland the best version of myself," said O'Connor, who has 44 Test caps.
"I came back last time and I wasn't in the best place mentally, but also physically I was quite broken, so I couldn't produce and perform the rugby I wanted to for the team.
"I'm finally ready to return and make amends. I want to do right by the team and the fans, and I intend to deliver the very best of my energy. If I can help the team get back to the top of the sport and if we can bring success back to Queensland, that would be a dream for me."
O'Connor could now make an immediate return to Australia's squad for the Rugby Championship.
Queensland Rugby Union (QRU) CEO David Hanham said: "In our discussions with James, he's been very open with us around the opportunity he had in northern England to reassess areas of his life and to re-evaluate his approach to professional rugby.
"The feedback from Sale is that he's been a strong contributor both on and off the field and we believe that he's a different person to the player that left Ballymore in 2015."
Rugby Australia's director of rugby, Scott Johnson, said: "James has immense talent. He started his career in Queensland and this is a chance for him to show his full potential for his home state.
"Now is the time for James' rugby to do the talking. He's come home for the right reasons to play rugby and to help develop our rugby programs. He's matured and understands the leadership roles both on and off the field. He's been honest and transparent throughout this whole process.
"We want to back the man to be the player we know he can be."