Donadel, who was released by Italian club Napoli last summer, played 244 games with six teams in Serie A between 2001 and 2014. He spent last season with Hellas Verona on loan from Napoli.
"He will bring a lot of experience and leadership to our team, as well as quality in the middle of the field," manager Frank Klopas said Monday in a statement. "He has the right mentality and character going forward for next season and the Champions League."
Klopas had stressed the need for help at the defensive midfield position in his post-season remarks.
The 31-year-old Donadel trained with the Impact for more than a week late in the season. At the time, the Impact said he was just visiting his friend, striker Marco Di Vaio, who has retired.
"Since the first training session in Montreal, the club made me feel like a part of their family," said Donadel. "Throughout this process, I felt like the Impact really wanted me to be a part of the team.
"I am really looking forward to January to get this adventure started."
Donadel was a highly regarded prospect when he began his career with Inter Milan.
He moved to Fiorentina in 2005, where he played 184 league games and another 11 in the UEFA Champions League in six-plus seasons. He also played in a friendly match for Fiorentina against the Impact on May 23, 2010 in Montreal.
Donadel helped Napoli win the Italian Cup in 2012. He played four league matches and eight UEFA Cup games for the club.
He had one goal in 23 games for Hella Verona in 2013-14. Donadel previously played for Parma and Sampdoria, as well as Lecce in Serie B.
He served as captain of the Italian team that won the 2004 European under-21 championships. He also won a bronze medal at the 2004 Olympics in Athens.
The deal is to be finalized when Donadel receives his visa and international transfer certificate.