The the 21-year-old spent the back-end of the 2009/10 campaign on loan at London Road, starting nine games, and Posh manager Gary Johnson has moved quickly to secure the youngster's signature.
Johnson told the club's official website: "I have watched games of Peterborough United prior to my arrival and Mark Little impressed me then and since my arrival at London Road he has continued to show the qualities required.
"Despite interest from several other clubs Mark only wanted to come here so I am delighted to have him on board because he is young and hungry and that is what we are looking for."
Little added: "It was one of the easiest decisions for me to make and I knew while I was here on loan it was a club I wanted to stay at. I need to be playing regular football, I am here to play, get a run of games and ultimately I want to be playing in the Championship again sooner rather than later.
"I got on with Gary Johnson, he is a very good manager and I am looking forward to playing under him again. I would not have signed for a League One side to stay in League One for very long and I can't see us staying at this level for very long. I am ambitious and so is the club."