The Spaniard impressed under Mikel Arteta last term and has re-joined the club from Real Madrid for a second temporary stay.
He will again wear the No 8 shirt.
Arteta is delighted to have the 24-year-old back on board describing him as “integral” to the Gunners late season run of form which saw them lift the FA Cup.
“Dani was and integral part of our team last season and finished the season in excellent form,” he said upon the announcement.
“I love Dani’s passion and commitment and he’s a highly skilful player. We’re all delighted to welcome him back and we look forward to seeing him pick up where he left off.”
Technical director Edu added: “We’re thrilled to have Dani back with us for the new season.
“We all know his qualities after an impressive 2019/2020 campaign, which ended with him playing a key role in our FA Cup success.
“We’re excited to add Dani to the list of quality players we are bringing in.”
Despite reported late interest from former club Real Betis it always seemed likely Ceballos would plump for another spell in the Premier League.
He posted on social media his support for Arsenal during their penalty shootout win over Liverpool in last week’s Community Shield.
Ceballos will not be available for the season opener away to newly-promoted Fulham as he will be required to quarantine for 14 days as per the UK’s coronavirus rules.
The loan signing of Ceballos follows the earlier free transfer of Willian from Chelsea and the arrival of defender Gabriel Magalhaes from Lille.
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