He played for Somerset last season and has since appeared for Karachi Kings and Central Stags in Pakistan and New Zealand’s T20 competitions.
The 39-year-old helped Sri Lanka win the 2014 World T20 and has scored 5,455 runs in the game’s shortest format.
“I can’t wait to watch him bat,” Lancashire head coach Glen Chapple told BBC Radio Lancashire.
“He has a massive amount of experience in T20 cricket, in cricket all around the world and great captaincy experience. He’ll add in all areas for us.”
Lancashire won their first T20 Blast title in 2015, but failed to progress from the group stage last season.
Board member Paul Allott told BBC Radio Lancashire in January that the Red Rose county were looking to sign an “iconic player or coach for T20 cricket”.
Jayawardene is their second signing for the Blast, which runs from 7 July to 2 September, and will play alongside Pakistan fast bowler Junaid Khan.
He does not count as an overseas player as he has been granted a spousal visa because his wife is Danish.
Former Sri Lanka captain Jayawardene said: “Lancashire is a huge county with a fine history in the game. There is a young group of players at the club and I’m really looking forward to the opportunity to working with them and to be part of the T20 campaign this summer.
“I haven’t won the NatWest T20 Blast in my career and it’s a trophy I’d love to experience success in this summer with Lancashire Lightning.” (Courtesy BBC Sport)