"It's like I'm reuniting with a long-lost love after 18 years," Toyota Chief Executive Akio Toyoda, an amateur race driver, told a news conference in Tokyo on Friday.
Toyota won four drivers' and three manufacturers' world titles in the 1990s before leaving the series as champions in 1999.
They were also banned for a year in 1995 after their car was found to be fitted with an illegal turbo restrictor.
The world championship currently has three works teams -- Volkswagen, Citroen and Hyundai -- along with non-factory Fords prepared by M-Sport.
The Yaris hatchback, called Vitz in some markets, is sold in 64 countries. Toyota said the rally car had already completed a preliminary test programme on asphalt and gravel stages throughout Europe.
Frenchman Eric Camilli, 27, will carry out the development programme with compatriot Stephane Sarrazin and Finland's Sebastian Lindholm.
Toyota, the world's biggest automaker, said it remained committed to Le Mans and the world endurance championship that it won last year.
"To run two works motorsport programmes simultaneously is of course a challenge but we believe we have the expertise and determination to succeed," said Cologne-based Toyota Motorsport president Yoshiaki Kinoshita.
The WRC promoter welcomed Toyota's return as "marvellous news for the sport".
"Toyota has a long and distinguished history in motorsport, particularly in world rallying, and we're delighted to welcome one of the automobile industry's giants back to WRC," Oliver Ciesla said in a statement.
"There is a clear link between World Rally Cars and the vehicles we drive in the street and that's a powerful marketing tool," he added.
(Reporting by Chang-Ran Kim in Tokyo, writing by Alan Baldwin in London; Editing by John O'Brien)
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