Kennedy, who won seven England caps in 2008 and 2009, requested to leave Toulon after just one season with the European champions in order to return to the Aviva Premiership.
Conor O'Shea, the Harlequins director of rugby who gave Kennedy his break at London Irish, said: "We are delighted that Nick has decided to join Harlequins. In doing so he has sacrificed a valuable contract at Toulon to return to England where he feels he has unfinished business."
O'Shea added: "His ambition is pretty clear in that he wants to win the Aviva Premiership and force his way back into the England squad ahead of the Rugby World Cup in 2015.
"I've known him since he came to professional rugby and I know that in Nick we have a player and a person who will fit into what this club is all about.
"Not only is he acknowledged by his peers as one of the leading lineout specialists in the country, he is physically strong, mobile and skilful and his game has benefited greatly from his stint in Toulon."
Kennedy, 31, initially struggled to settle on the Cote d'Azur and at times last season he admitted to doubting the wisdom of his move from London Irish, after 11 years at the Exiles.
But Kennedy forced his way into Toulon's star-studded team and he achieved a career-long ambition in winning the Heineken Cup with a 16-15 victory over Clermont Auvergne in Dublin.
"I've had a memorable year in the south of France and winning the Heineken Cup with Toulon will rank among the highlights of my career," Kennedy said.
"The opportunity to return to England and join Harlequins has come at the right time for me. I'm looking forward to the challenge and to being part of an exciting squad of talented players."