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Hill, 31, will return to Redfern, where his NRL career started against the Canterbury Bulldogs in the first round of the 1990 season.
Media speculation was rife that Hill had already pledged to the Rabbitohs, but there was significant interest in the former international centre from at least three other NRL clubs.
South Sydney captain Bryan Fletcher says the leadership that Hill will provide the young Rabbitohs squad will be invaluable as they grow into a more competitive first grade side.
?It?s no secret that we have been looking for experienced players to help out in a leadership capacity,? said Fletcher.
?Terry provides a lot of inspiration to the players around him he?s achieved everything the game has to offer and is still one of the toughest players in the competition.
?He intimidates the opposition and inspires his teammates to work and play as hard as he does every time he laces up the boots.
?Terry Hill will be a steadying influence and extremely positive presence for the South Sydney Rabbitohs in NRL season 2004.?
Fletcher, who has played with Hill at State of Origin level and has toured alongside him with the Australian Kangaroos, believes Hill will be one of Souths most important acquisitions for next season.
?Terry won?t mess around ? he?ll teach the young blokes what they need to know about playing rugby league at the elite level and winning matches.
?He?s played under some of the game?s best coaches and isn?t afraid to get out on the field or the training paddock and make his presence felt.
?Some experts think that because he?s in his 30?s that his time is up, but Terry gets out there and still plays at a very high level, and his attitude to football hasn?t changed.
?I can?t wait for Terry to don a Souths jersey and get on the field for the Charity Shield against St George Illawarra in February,? Fletcher concluded.