The 26-year-old, who played 44 tests and was starting flyhalf against the British and Irish Lions during their 2013 tour, will cross from French glamour team Toulon for a second stint in England after playing with London Irish in 2013/14.
O'Connor told Australian media in February he was determined to return home and win a spot in Michael Cheika's team for the World Cup in Japan having had his Wallabies contract torn up in 2013 after a series of off-field transgressions.
Two weeks later, however, he was arrested by Paris police after buying cocaine with former New Zealand lock Ali Williams on a night out. He was later suspended by Toulon and his contract put under review.
Sale Director of Rugby Steve Diamond said on their website he was delighted O'Connor was joining the side, who finished 10th in the 12-team Premiership's 2016/17 season.
News that makes sense
Your trusted source for staying up-to-date with the world around you. Get free daily news updates and analysis, straight to your inbox.
"He is a world class versatile back that will add a lot to our game," he said.
"He has a lot of experience and is keen to show his international calibre."
(Reporting by Ian Ransom in Melbourne; Editing by Peter Rutherford)
