Sources told ESPN.com that Ellis and the Pacers have verbally agreed to a four-year deal worth $44 million that includes an option for the shooting guard to return to free agency after Year 3.
The Pacers' push to sign Ellis was at the behest of team president Larry Bird, who led a contingent of team officials that dined with Ellis on Wednesday night. The Pacers are looking to play at a faster tempo and have been looking for some time for more scoring punch in the backcourt.
Ellis turned down a larger offer from the Sacramento Kings, who offered him a four-year, $48 million deal, sources said.
In addition to the opportunity to play with Pacers star Paul George, Ellis was drawn to Indiana because of its proximity to Memphis, Tennessee, hometown of his wife Juanika, who plans to attend law school in Indianapolis. Ellis also has two children living in Memphis, which is a 4 1/2 hour drive from Indianapolis.
"This is absolutely the best fit for Monta on the court and Monta's family off the court and in all circumstances involving a young family,'' said Jeff Fried, Ellis' agent. "Our goal was to have the entire family unit come out winners on this deal and that is what we believe we accomplished."
Ellis didn't exercise the final year of his deal with the Mavericks last month, forgoing $8.7 million and opting instead for free agency.
A 10-year veteran, Ellis has a career scoring average of 19.3 points per game, the highest in NBA history among players who never have been an All-Star.
Ellis signed with the Mavs in the summer of 2013 after declining an $11 million player option for the final season of his previous contract and turning down a three-year, $36 million offer to remain with the Milwaukee Bucks. He settled for a three-year, $25 million deal from Dallas with a player option for the final season.
The 6-foot-3 Ellis, an undersized shooting guard who is one of the league's most dynamic off-the-dribble threats, played a key role in the Mavs' winning a total of 99 games and advancing to the playoffs in each of the past two seasons after Dallas' one-year postseason absence.
However, his moodiness was cited by several team sources as a factor in the Mavs' chemistry issues last season.
ESPN.com's Tim MacMahon contributed to this report