Taylor has made just seven appearances since leaving Posh in 2012 to move to the Tractor Boys, and boss Darren Ferguson believes that the 25-year-old will find it easy to fit back in at London Road.
The 41-year-old told the club's official website: "When it became clear that we could get him, I couldn't turn that opportunity down. Paul is a very good player and that is why he got the move that he did.
"When you get a player on loan, it sometimes takes quite a long time to settle and
get to know everyone, but Paul knows the place and the lads.
"He knows how we want to play, which is the important thing."
Taylor scored 14 times in 53 appearances during his previous stay with the League One club.