Sanchez, 28, is 48-51 with a 3.75 career ERA for the Tigers and Miami Marlins. He was regarded by many observers as the second-most attractive starting pitcher on this winter's free-agent market, behind Zack Greinke, who agreed to a six-year, $147 million deal with the Los Angeles Dodgers earlier this week.
Sanchez reportedly had reached agreement on a five-year, $75 million contract Thursday with the Chicago Cubs, but the deal apparently unraveled and he elected to return to Detroit.
Sanchez impressed the Tigers with his performance after coming to Detroit with second baseman Omar Infante in a July deadline trade with the Marlins. He went 4-6 with a 3.74 ERA in 12 regular-season starts for manager Jim Leyland, and recorded a 1.77 ERA while going 1-2 in three postseason outings.
He will join Justin Verlander, Max Scherzer and Doug Fister at the top of Detroit's 2013 rotation. Barring another move by manager Dave Dombrowski, Rick Porcello and Drew Smyly are likely to compete for the fifth starting spot.