Palace will have the option of making the move permanent in the summer.
Vaughan told the club website: "I'm really glad the move's been completed. I'll hopefully start training with the lads and playing soon."
A number of other clubs were linked to Vaughan, but new Crystal Palace manager Dougie Freedman will be hoping the Birmingham-born forward's goals will keep the side in the second tier.
Vaughan added: "Dougie was a big part in me coming back. he worked really closely with me last time I was here.
"The Palace fans have always been good to me and while I've been away a lot were trying to contact me, which was great."
Vaughan came through the ranks as a trainee at Everton and made eight first team starts before spells on loan at Derby County, Leicester City and at Selhurst Park.
Source: BBC Sport
Source: BBC Sport