"Pablo comes to TFC with an exceptional pedigree," Toronto FC president Bill Manning said. "He brings big-game experience to our team, having played in close to 300 games in La Liga, as well as competing in the UEFA Champions League. We believe he's the type of dynamic player who is going to enhance our attack and TFC fans are really going to enjoy watching him play."
The 30-year-old joined Espanyol on loan from Valencia in 2016 before completing a permanent move to the Catalan club a year later. He scored 14 goals and provided 19 assists during 95 appearances.
He's expected to link up with his new teammates Saturday in California.
The 2017 MLS champions were in search of a third Designated Player after a spot came open in December when club captain Michael Bradley relinquished the title and accepted a new contract using targeted allocation money.
TFC's other Designated Players are Spanish playmaker Alejandro Pozuelo and forward Jozy Altidore.
Piatti previously plied his trade in Toronto when he was a member of the Argentina squad that won the 2007 FIFA U-20 World Cup. He ended up featuring in 80 minutes of the title match at BMO Field.