Bailey, 31, whose career took off at Sutton back in the early 2000s before going to have spells with Barnet, Southend United, Charlton, Middlesbrough and Millwall, returned to Barnet in October, but was released after making just four appearances.
Sutton boss Paul Doswell was delighted to add Bailey to the squad: "He is a quality player and also gives us another commanding voice in the dressing room.
“He has trained with us for the last two weeks and has shown a real desire to be part of the squad. He looks fit and now needs competitive games. We sat down after training on Thursday and agreed terms very quickly as he appreciated the club has a strict budget and he hasn't signed for the money! We just talked football for an hour and Nicky feels he's coming back full circle to a club he's extremely fond of, and is raring to get going.
“It's so refreshing to see a player who has played at such a good level just want to play football again and as I pointed out to him it's a win-win, because if Nicky plays well and stays match fit for a period he will surely have good League clubs vying for his services next season."