Nine-time world champion Loeb will join the British squad to contest the Monte Carlo Rally season opener next month, where he will drive a fourth Ford Puma alongside full-season drivers Craig Breen, Gus Greensmith and Adrien Fourmaux.
The agreement is only for one round at the moment, but it is understood further outings could be in the offing.
Signing the 47-year-old represents a significant moment for M-Sport founder Wilson, who revealed he initially attempted to sign Loeb following his breakthrough title with Citroen in 2004.
Loeb instead remained with Citroen, going on to win eight more titles consecutively with the French brand before retiring from full-time competition at the end of 2012.
His last WRC participation came with Hyundai on Rally Turkey last year, although he has remained active by finishing runner-up on countback in the all-electric Extreme E offroad series for Lewis Hamilton's X44 team.
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Wilson has described the signing as a "fantastic result" for his team as it prepares to kick off the WRC's new Rally1 hybrid era.
"In relation to Seb, I came close to securing a deal with him back in 2005 but unfortunately at that time we were not able to make it happen," said Wilson.
"However, with the introduction of the new 2022 Rally1 regulations and following discussions with Red Bull, we both reached out to Seb to see if he might be interested to come and try the new cars - he was, he did and now we find ourselves in a position to say that he will join the team next year.
"It is fantastic to be able to bring such an accomplished driver to M-Sport and I have no doubt he is still capable of a fantastic result as well as being a mentor to our other drivers.
"It might have taken over 16 years to get this deal to come to reality, but it is great to see it finally happen."
M-Sport team principal Richard Millener is relishing the opportunity to work with Loeb, having previously worked with newly-crowned eight-time world champion Sebastien Ogier during his 2017 and 2018 title-winning seasons.
"I am still quite early in my rallying career, but I have been incredibly lucky to work with some incredible drivers in the last years," said Millener, who conceded that having the chance to work with Loeb was "something I never really thought would happen".
"I know myself and the team will give everything we can to welcome him to the team and give him the best possible chance to get the best results," he added.
