The Manchester City flop returns to Ewood Park after quitting the club for Eastlands in a £18million move in the summer of 2009.
Cruz, who scored 29 goals in two seasonsat Blackburn, is the club's first signing since their takeover by Indian firm Venky's in November.
Rovers confirmed the deal after the player completed a medical at the club's training ground on Friday morning.
Rovers return: Santa Cruz will join Blackburn for the second time
'I feel like I am coming home. This has been the easiest decision of my career,' Santa Cruz said.
He admitted his frustration at a lack of action at Manchester City.
'I felt a bit ignored by the manager (Roberto Mancini) of course. It's been hard not to play, not to be chosen, even though I feel great,' he added.
'It's frustrating, I've been playing a lot through the years with small injuries and just when I feel perfect to play and perform I wasn't selected.'
'Through the media I kind of expected Blackburn to know I would decide to leave City and go somewhere I can play and be more appreciated, so when they showed their interest for me it was very easy to decide.'
On a permanent return to Ewood Park, he told BBC Radio Lancashire: 'Maybe we can do something permanently. Blackburn's always been home to me they've treated me very well.'
'I want to get playing and scoring goals again and this is a real chance for me to prove myself after a frustrating period. 'Everyone knows what Blackburn Rovers means to me.'
Manager Steve Kean added: 'When he was here first time he had a fantastictime and showed his quality.
Fans' favourite: Santa Cruz scored 29 goals in two seasons at Blackburn
'I think he feels he has got a little bit of business to finish. Hopefully he will go and do that until the end ofthe season.
'He has got an infectious personality and was very popular here first time around. I'm sure he will be this time.
'He's coming backto a place that was special to him and I am sure he is going to deliveras good if not better.'
City have hardened their stance on the issue ofwages for loan players since agreeing to subsidise Craig Bellamy's moveto Cardiff earlier this season and Blackburn will pay the majority of Santa Cruz's £90-000-a-week salary.
Making his point: Kean says the signing of Cruz illustrates Blackburn's ambition
Kean believes that shows how serious Venky's are tobring top players to the club. The company, who are yet to win over thefans, were ridiculed earlier this month for making over-ambitious attempts to sign Brazil star Ronaldinho.
He said: 'That is something that shows the fans we can now go and compete and we can see off other teams, not only in this country but abroad.
'It shows the ambitions of the owners to match these fees and salaries to bring quality to the club.'
The agreement with City contains no provision for a potential permanent deal but Kean plans to continue negotiating in the hope of securing Santa Cruz's services long term.
He said: 'We are trying to speak to Manchester City to see if there can be an option at the end of it. 'We'll ask for that and if we can get it, all the better.'
Santa Cruz has made just two appearances this season at City, where he has been behind Carlos Tevez, Mario Balotelli and Emmanuel Adebayor in the pecking order.
His move has been hastened by City's signing of Edin Dzeko this month.
Kean said: 'I don't think his medical fitness is an issue although his match sharpness might not be there because he has notplayed as many minutes as he would have hoped'
Manchester City misfit Santa Cruz set for return to BlackburnMourinho raises the stakes in bid to rescue Adebayor from City BLACKBURN ROVERS FC