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The news was confirmed on Sunday, with the 40-year-old ready to make his 814th professional appearance - having only officially announced his retirement last month.
Sharp has been without a club since leaving Doncaster Rovers in the summer, but is set to put the boots back on at the Pirelli Stadium and will be setting his sights on netting a landmark 300th career goal.
The move sees Sharp's career come full circle, as he made his first senior start as a player on loan at Rushden & Diamonds in the EFL back in January 2005.
He would score his first nine career goals while at Nene Park, including a famous last-gasp winner in a 3-2 home victory over county rivals Northampton Town.
He also netted a first career hat-trick in a 4-2 league two win over Boston United.
Diamonds have made the move as they needed cover following regular striker James Clifton's suspension for accumulated bookings.
A Diamonds club statement read: "After 21 years away, AFC Rushden & Diamonds are excited to announce that Billy Sharpe becomes a Diamond once again.
"Billy scored the first of 299 goals for Rushden & Diamonds back in 2005.
"The man who put the ball in the Cobblers net, has 299 career goals spanning over 22 years.
"Featuring for Rushden & Diamonds, Sheffield United Doncaster Rovers, Southampton and Scunthorpe United to name a few!
"Billy comes in to help the club with James Clifton being suspended, and we can’t wait to see him pull on the shirt one final time as we go to Burton Albion in the FA Cup first round proper for the first time in AFC Rushden & Diamonds' history."
Sharp has recent previous of scoring crucial FA Cup goals, netting twice at Latimer Park in December, 2024, as Doncaster beat Kettering Town 2-1 after extra-time in a second round date.
He also scored in the first round last season as Doncaster claimed a 2-1 win at Crewe Alexandra.
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