The 28-year-old midfielder, who left Saints for Easter Road in 2013, has signed a one-year contract with the Perth club.
St Johnstone manager Tommy Wright told his club website: "When a manager makes any signing he's pleased.
"But the thing about Liam is that I didn't want him to leave in the first place."
Craig first joined Saints in 2007 on loan from Falkirk but signed a pre-contract agreement to join Hibs shortly before Wright stepped up from his assistant role to take over from the departing Steve Lomas.
"His experience and knowledge of the club is vital and that came into my thinking," said Wright.
"He has a wealth of experience but is still a good age and he has shown in training and in the (friendly) game against Real Sociedad that he is as good as ever.
"Also, he chips in with goals from midfield and that is something any team needs."
Craig suffered relegation with Hibs and played 32 times for the Edinburgh side in the Scottish Championship last term.
He said: "It goes without saying that I'm delighted to come back.
"I have a lot of great memories from the last time and I want to play my part in creating new ones and helping the club continue its successes in recent years, particularly the last two.
"Sometimes you just get the 'right fit' and in the time I've been back training it's almost like I've never been away."
Liam Craig has returned for a second stint with St Johnstone after his summer release by Hibernian.