The 33-year-old will arrive at Lord's in June as a replacement for fellow countryman Adam Voges, who is expected to be called up to the Test side.
"I can't wait to get over there. I'm itching to play in the UK again after a productive and enjoyable stint last year," he told the club's official website.
"Middlesex is a quality club and I'm looking forward to helping them achieve their objectives this season. Playing at Lord's is an absolute honour. Who wouldn't want to have Lord's as their home ground?"
Bailey has made five Test appearances for Australia, as well as featuring in 71 one-day international games and a further 28 Twenty20 fixtures.