The team did not disclose financial terms of the deal in a statement to announce the signing, but local media reported he would earn around $1.25 million.
After missing the playoffs in each of the last two seasons, the Stars informed Modano in June they were moving forward with younger players and would not re-sign him.
The center, who grew up in the Detroit area, brings plenty of experience to a Red Wings team that came one win short of winning the Stanley Cup in 2009.
Modano, the top pick in the 1988 NHL Draft, spent his first four seasons with the Minnesota North Stars and moved with the franchise in 1993 when it relocated to Dallas, where he played for the past 16 seasons.
The eight-time All Star, who also played for the United States in three Olympics and three world championships, leads all U.S.-born players with 1,359 points. He had 14 goals and had 16 assists in 59 games for Dallas last season.