Powell, 22, scored 12 goals in 41 appearances for Championship side Wigan during a loan spell in 2013-14.
He joined United for £3m from Crewe in 2012 and was loaned out to Leicester City and Hull City before his contract expired in June.
"He is the one player we wanted this summer and we are so happy we've got him," said Wigan boss Gary Caldwell.

Stormont officials have refused to give any details citing confidentiality.
Homeowners will not face bills until at least March 2017, after MLAs ruled to defer charges.
Instead, the executive pays the cost of Â£280m a year to NI Water. Further legislation is expected to extend the policy.
However, the decision could mean that the authorities are not complying with European rules on water quality.
The EU Water Framework Directive envisages that users should pay for their water to promote conservation.
Officials in Northern Ireland make the case that people do that through their regional rate.
Northern Ireland is the only part of the UK not to levy a charge on homes, although businesses do pay charges.
That has prompted a debate with calls for the introduction of a charge on homes to pay for improvements in infrastructure.
Now, the European Commission has opened a so-called "pilot case" to look at the issue.
Essentially, this is a way for the commission to establish whether EU rules are being correctly applied.
It allows for the commission and member states to resolve any conflicts without resorting to infringement proceedings.
The Department of Agriculture Environment and Rural Affairs (DAERA) said it could not comment on the detail of the case.
"It is the subject of a confidential dialogue with the Commission and the release of further details could potentially prejudice the outcome of those discussions," said the department.
The two sides get about 20 weeks to try and sort out their differences.
Many cases are resolved without going to a formal hearing.

It condemned "the misogynist, hateful comments" it said had been made by Mr Trump about women and minorities.
It follows the release of a 2005 video last week in which Mr Trump makes remarks about groping women.
Mr Trump has apologised for remarks, which he described as as "locker-room talk".
He has also denied touching women inappropriately.
The motion was filed by Greens party MP Jeremy Buckingham to the Upper House of the NSW parliament.
It said: "This house... agrees with those who have described Mr Trump as a 'revolting slug'."
"It's clear that all reasonable and decent people find Donald Trump's behaviour obnoxious and that the world is hoping American voters reject his politics of hate," Mr Buckingham said in a statement.
Because there was no objection, the motion was recorded as having been agreed to by all of the lawmakers.
It was allowed only after the president of the legislative council determined that "revolting slug" did not amount to unparliamentary language. Parliamentary procedure prevents MPs from using "extremely distasteful" words.
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Hillary Clinton
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Australians on social media were critical of the politicians with James Elliot Watson saying on Facebook: "I don't think it's wise for governments to condemn a bloke who they might have to work with as a world leader in future."
"What a spectacular waste of time. Glad to see the House discussing the real hot button issues as they relate to NSW," said David Kelley.
Others pointed out that Australian politics had its own share of problems.
"Why bother for a revolting slug overseas, try looking at our own backyard. Plenty of slugs in Australia," said Bradley Patterson.
"Australian politicians need to keep their mouth shut. They are no better because really that is all they are. And slugs is quite generous to describe them," said Katherine Fav.
Mr Buckingham has developed a reputation for publicity stunts both inside and outside parliament. He previously 'vaped' an e-cigarette in parliament and set a river in Queensland on fire.
Many top Republicans, including House Speaker Paul Ryan, have distanced themselves in recent days from the businessman-turned-politician Mr Trump.
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Wigan Athletic have signed former Manchester United midfielder Nick Powell on a three-year contract.
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The European Commission has asked questions about the Northern Ireland Executive's decision not to charge homeowners for water.
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The parliament of New South Wales, Australia has passed a motion calling US presidential candidate Donald Trump a "revolting slug" unfit for office.