The 31-year-old Falcons academy graduate won three Premiership titles with Leicester in his nine years away from Kingston Park.
Flood, who has been capped 60 times by England, said: "When the opportunity came on to the table, it didn't take long for me to make the decision.
"It really feels like I'm coming home, and I've watched a fair amount of Newcastle's games in recent months."
Falcons, who have now made 10 signings for the 2017-18 season, did not disclose the length of Flood's contract.
Flood, who made his Premiership debut for Newcastle in 2005, spent six season with Leicester where he went on to become club captain.
He has spent the past three seasons in the French top flight with Toulouse.
Falcons director of rugby Dean Richards said: "Toby is a proven performer at the very top level, he is a local lad and it is a huge boost for us to be able to add a player of his quality to our squad.
"He has vast leadership experience, he will bring an extra dimension to our game and this really is a signing which outlines the ambition we have to rise even further up the Premiership table."
Newcastle won their final match of the Premiership season on Saturday, beating relegated Bristol 39-27 to finish eighth in the table.
"We have quality players coming through our academy and a number of major new signings joining us," Richards added.
"All the signs are really positive for next season and it is a hugely exciting time to be involved with the club."

In the alleged fraud, the volunteers rang the emergency 115 number themselves or got friends or relatives to do it. Their commander allegedly skipped shifts in order to start fires.
The team, in the Ragusa district, came under suspicion because they were called out more often than others.
Each was paid about â‚¬10 (Â£9) an hour.
Italians are sweltering in a heatwave that has pushed temperatures above 40C (104F) and dried out the vegetation, making wildfires common.
Spain, Portugal, southern France and the Balkans have also experienced abnormally hot weather this summer.
Italian media report that most of the 15 volunteers detained in Ragusa have admitted starting fires deliberately. Ragusa is in southeastern Sicily, about 105km (65 miles) from Catania.
Newcastle have re-signed fly-half Toby Flood from French side Toulouse.
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Italian police have detained 15 volunteer firefighters in southern Sicily accused of starting fires in order to get paid to put them out.