"Returning home to the Mercedes family as third driver for 2025 is what's next and I couldn't be more pleased," said the 35-year-old Finn who was not retained by Sauber ahead of their takeover by Audi.
"I want to thank Toto (Wolff), the team at Brackley, and everyone at the three-pointed star for welcoming me back with open arms."
Bottas won 10 Grands Prix during his five years at Mercedes alongside Lewis Hamilton from 2017 to 2021.
"Despite the challenges of the past few years, I know that I've still got so much more to contribute to F1," he continued.
"As I return to the place where so many of those moments were achieved, I'm looking forward to using all the knowledge I've gained to help the team to perform and progress towards our goal of fighting for world championships."
Bottas experienced three difficult seasons in the Alfa-Romeo team, renamed Sauber, finishing tenth in the drivers' standings in 2022, 15th in 2023, and 22nd with no points last season.
Mercedes will change their line-up next year following seven-time champion Hamilton's switch to Ferrari -- George Russell will remain with Italian teenager Andrea Kimi Antonelli replacing Hamilton.
"Welcome home, Valtteri!" said Wolff. "It's great to have you back."
Wolff praised Bottas' "immense impact and contribution" in his five years with the team.
"Along with scoring multiple Grands Prix wins, he played a vital role in five of our championship victories," said Wolff.
"His technical feedback and input were important in helping us to those successes and pushing the team forward.
"Not only that, but he was also a fantastic colleague and team member. His dry sense of humour and personable nature made him a firm favourite with everyone.
"In his role as reserve driver, all those qualities will be incredibly important in helping us compete for world championships and supporting both George and Kimi on track."
Schumacher, 25, son of seven-time champion Michael Schumacher, had been Mercedes' reserve for two years after spending two years with the Haas team.
