The Reds have paid an undisclosed fee for the Algerian international, who made such a big impact while on loan at The City Ground last season.
Guedioura made 19 appearances for the Club after arriving in January and scored the goal that set Forest on their way to a remarkable 7-3 win at Leeds.
Forest Chairman Omar Al Hasawi said: "The Al Hasawi family is delighted to have secured Adlene Guedioura as Nottingham Forest's first signing under our ownership.
"He made a huge impact on the team last year and is just the kind of exciting player that we want to see gracing the City Ground this season."
O'Driscoll said: "When I heard that Adlene was available for transfer I moved quickly to sign him.
"He knows the club, knows the fans, and knows what's expected of him on the field. I look forward to utilising his expansive midfield play this season."
The richly-talented 26 year old midfielder launched his career in French football and had a spell in Belgium before attracting the attention of Wolves in January 2009.
He moved to Molineux on loan initially but his move was made permanent in the summer of 2009 and made more than 30 Premier League appearances for Wolves before falling out of favour.
Adlene Guedioura is flanked by Chairman Omar Al Hasawi and Manager Sean O'Driscoll on his return to The City Ground.
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