The veteran shooting guard will sign a two-year contract worth $2.8 million per season, two league sources told ESPNNewYork.com. The deal is guaranteed for the first season and contains a player option for the second season.
"I have decided to re-sign with the Knicks. I just felt that, despite my other options, New York is the best situation for me," Smith said in a statement released to ESPNNewYork.com. "Coach (Mike) Woodson showed a lot of faith and trust in me last season, as did (Knicks owner) Mr. (James) Dolan and the organization.
"My teammates are great to play with and New York fans are the best. I can't wait to get started."
The 6-foot-6 Smith is expected to start at shooting guard for New York in 2012-2013 after coming off the bench last season. Landry Fields, last season's starter, has reached a verbal agreement with the Toronto Raptors on a three-year offer sheet for approximately $20 million -- a deal the Knicks are not expected to match.
An eight-year veteran, Smith averaged 12.5 points, 3.9 rebounds and 2.4 assists per game for the Knicks last season.
The Knicks will have Smith's early Bird rights after next season, meaning they can exceed the salary cap to re-sign the shooting guard if he decides to decline the 2013-14 player option.
The Monday night agreeement capped a busy day for the Knicks.
The team also is expected to match the Rockets' offer sheet to point guard Jeremy Lin. Lin verbally agreed to an offer sheet worth $28.8 million over four years last week. He can sign the deal Wednesday. The Knicks then have three days to match the offer.