The 28-year-old has previously played for Exeter Chiefs between 2007 and 2010 and Bristol Rugby, where he worked with current Worcester Head Coach Richard Hill and scored 326 points in 61 appearances.
Hill praised Gray's attitude at Warriors this season and is delighted he will continue to push Andy Goode and Joe Carlisle for a starting spot in the No.10 jersey at Sixways.
"Danny is an excellent all-round player, an good passer off both hands who plays flat, has a strong side step and takes defences on," said Hill.
"His kicking percentage is also very good and he is a gutsy player at 10 who puts his body on the line for his team-mates. He is someone you can rely on to stick to the game plan.
"Danny is an excellent professional who we signed to compete for a starting place with Andy and Joey. He has impressed everybody at Warriors with the way he works hard on every aspect of his game to improve his performance.
"The squad now has every confidence in him and that is testament to the work and effort he has put in. He wants to play every week and feature in as many games as he can for the first team.
"It is vital that we have three top fly halves at Warriors and in Danny, Andy and Joey we have real competition for the No.10 shirt going forward."
Gray added: "The move has been really good for me and my aim coming back from France was to take the opportunity as best I could and be in a position where I could hopefully stay.
"The French experience helped me learn a lot, but coming back here you appreciate everything so much more. Especially being a ten, being over in France is like having one of your senses taken away with the communication. Being at Worcester has made a big difference to me.
"I always knew it was going to be difficult this season with Goodey and Joey, they are established number tens at the club. I knew it would need time and I'm happy with how I've settled. I have pushed them and now it is a case of waiting for opportunities.
"Each time you get an opportunity you try and make a statement, I want to play as much as I can and want to play at home so the supporters can see me. A lot of my games have been Monday nights and Europe, but I have really enjoyed it all and I'm now looking forward to kicking on.
"It's great to see that the work and effort you put in during the week is recognised. Hilly has always been a big fan of hard work and I knew, when coming here, if I put the work in then it would be rewarded."