Smith, who finished last season on loan at the League One club, will complete a switch to stadium:mk on a two-year contract on Tuesday following his release from Newcastle.
The 31-year-old made a surprise move to MK Dons from Premier League club Newcastle in January and went on to make 18 appearances for Karl Robinson's side.
Yorkshire-born Smith made a name for himself with hometown club Leeds as an 18-year-old, scoring on his debut against Liverpool in 1998. Smith's six-year spell at his beloved Leeds saw him score 56 goals in 228 appearances and he was part of the side that reached the Champions League semi-finals in 2001.
In 2004, following Leeds' relegation from the Premier League, Smith made a controversial switch to Manchester United for a £7 million transfer fee. During his three years at Old Trafford Smith won the Premier League title and the Carling Cup, but his time with the Red Devils was marred by a horrific broken leg and dislocated ankle sustained in an FA Cup tie against Liverpool in 2006.
After regaining full fitness Smith made the switch to Newcastle in August 2007, signing for an undisclosed fee, and went on to be a key member of the Magpies' Championship winning side in 2009/10.