Bynum, who stands 7-foot-1, gives the Pacers additional bench strength and height heading into the home stretch of the regular season.
"He is a skilled big man and he has championship experience," Pacers President of Basketball Operations Larry Bird said in a statement. "With the minutes he gets, he should be a valuable addition."
Terms of the deal were not announced, but ESPN.com said sources reported the contract was for $1 million.
Bynum will join the team next week and back up Roy Hibbert.
Bynum averaged 8.4 points and 5.3 rebounds in 24 games with Cleveland this season. The Cavaliers traded him to Chicago in January for Luol Deng, and the Bulls released him the day of the trade.
His best season was 2011-2012 when he averaged 18.7 points and 11.8 boards with the Los Angeles Lakers.
Bynum sat out the 2012-2013 season with a knee injury.
"I think it's the right fit for me," Bynum said in the statement. "I think we've got the best chance of winning."
ESPN said the Pacers may have improved their bench but signing Bynum also pre-empted any move by NBA East rival Miami to sign him.