The 31-year-old, who has been a free agent since leaving Scunthorpe United in June, initially left the Cobblers in 2004 to join Barnsley.
"Paul will add leadership qualities, an aggression and some depth to the back line," Northampton boss Aidy Boothroyd told the club's official website.
"He was fantastic for me at Colchester and I'm convinced that had he stayed fit we would have got promoted [in 2009-10].
"He's in very good shape and he's fit to go straight into the squad for Saturday [against Morecambe]."
Reid made 77 appearances for Scunthorpe in three years at the club.