The move, announced on Saturday, gives the Eastern Conference leaders additional size and depth in what will likely be a late season showdown with the reigning league champion Miami Heat for the Eastern title and a spot in the NBA Finals.
Miami, which trails Indiana by three games for the current Eastern lead, beat the Pacers in seven games last season in the conference finals.
Terms of the deal were not announced but Indiana media reported the contract worth $1 million.
"We are obviously happy to have him join our team," Pacers President of Basketball Operations Larry Bird said in a statement.
"He gives us added size, he is a skilled big man and he has championship experience. With the minutes he gets, he should be a valuable addition."
The 7-foot, 285-pound Bynum is expected to join the Pacers sometime next week.
"It really wasn't a hard decision," Bynum, a 2012 All-Star, said. "I think it's the right fit for me and, in all honesty, I think we've got the best chance of winning.
"It will be great to back up Roy (Hibbert) and I'll do whatever I can to help this team."
Bynum, 26, played seven seasons with the Los Angeles Lakers and helped them win the 2009 and 2010 NBA titles.
He was traded to the Philadelphia 76ers in August 2012 but missed the 2012-13 season with knee problems.
Bynum signed with Cleveland for the current season, averaging 8.4 points and 5.3 rebounds in 24 games before being traded to Chicago on Jan. 7. The Bulls released him the next day.
He has career averages of 11.5 points and 7.7 rebounds. (Reporting by Gene Cherry in Wilson, North Carolina; Editing by Mark Lamport-Stokes)
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