The hard-hitting 30-year-old played the last of his seven tests against Bangladesh in September 2017 and missed out on a spot in the squad for the ongoing four-match series against India.
Maxwell will join up with former Australia test opener Joe Burns and his former World Cup-winning team mate James Faulkner at Lancashire, and play all three formats with the county side.
"This is a pretty clear sign I still want to play test cricket," Maxwell told Melbourne's Herald Sun newspaper on Wednesday.
"To knock back a chance to play IPL was a big decision, and a tough decision. It's not something you make lightly, but the thought of playing test cricket again still burns deep.
"I desperately want to get back out there and I still think I have a lot to offer the Australian test team."
Maxwell has reaped millions of dollars playing in the IPL but had a poor tournament with Delhi Daredevils this year and was released by the franchise last month.
He was controversially overlooked for the tour squad to play Pakistan in United Arab Emirates in October, beaten out by four uncapped players.
Tim Paine's Australia are 1-0 down in the four-test series against India after losing by 31 runs in Adelaide on Monday. The second test starts in Perth on Friday.
(Writing by Ian Ransom; Editing by Ian Chadband)
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