The striker becomes Liverpool's first summer signing.
The 32-year-old rejoins the club he was released from as a 15-year-old having spent his career climbing the league ladder.
He strengthens Liverpool’s striking options for next season as the side looks to build on a second place finish, along with returning to the Champions League for the first time since 2009.
Lambert told the Liverpool website: “I can’t believe it. I’ve loved this club all my life. To be back here now is hard to describe.
"I have always dreamt of playing for Liverpool, but I did kind of think the chance of playing for them had gone. I didn't think the chance would come.
"I know how big Liverpool are - and it means everything to me - but I know what is important; I know it's what I do on the pitch and the minutes I play. I know that's what matters, and that's what I'll be focused on."
For many it could be seen as the fairytale ending for Lambert’s career on what is believed to be a two-year deal, though the chances are he may want to earn a deal beyond that. It’s a signing that can provide Liverpool with a lot of experience as well as passion and a different striking option.
Luis Suarez and Daniel Sturridge are sure to remain the two main striking options for the Reds, whilst Fabio Borini is also said to provide another option up front for Liverpool having spent last season on loan at Sunderland.
Prior to his time at Southampton – where he played with them in both League One and the Championship prior to their promotion to the top flight in 2012 – Lambert spent time at Blackpool, Macclesfield Town, Stockport County, Rochdale and Bristol Rovers.
Lambert may not be the first player through the door from Southampton at Anfield this summer, with the Reds actively pursuing midfielder Adam Lallana, whilst defender Dejan Lovren has also been linked with a summer move to Merseyside.