Saints have announced they have agreed a two-year deal “in principle” with 32-year-old Walcott once his current contract with Everton expires in June.
Walcott has spent the current season on loan at St Mary’s where boss Ralph Hasenhuttl has been impressed by his influence on the club’s young players.
Walcott said: “I’m not sure I can properly express how happy I am about this.
“Southampton is a club that means so much to me, and it has been incredibly special for me to have spent this season back at St Mary’s.
“But to now have the opportunity to return for a further two years means such a great deal to me, both personally and professionally.
“I would like to say a huge thank you to the club, my team-mates and the fans for making me feel so welcome back here, and I can’t wait to continue pulling on the shirt in the next couple of seasons.”
Walcott rose through the club’s academy and became Saints’ youngest senior goalscorer when he netted on his full debut at Leeds at the age of just 16.
He moved to Arsenal in January 2006 and also amassed 47 England caps before joining Everton in 2018.
Walcott made an emotional return to Saints at the start of this season after becoming surplus to requirements at Goodison Park, and Hasenhuttl hailed his influence.
He said: “Theo has been a very good influence for us this season.
“He is a very professional player who does things in the right way and has a very positive impact not only on our young players but on the dressing room as a whole.”
Walcott, who made 77 appearances for Everton, paid tribute to the club, saying: “I would also like to say thank you to everyone at Everton, who have been so good to me throughout my time with the club, and I wish them every success in the future.”