Latham, the second-highest try-scorer in Australia's history, has been acquired with the exclusive option of a third year which could keep him at Sixways until the end of the 2010-11 season.
The 32-year-old appeared in all of the Wallabies' World Cup matches this year and scored five tries.
Warriors director of rugby Mike Ruddock said: "We're absolutely delighted that Chris Latham, the world's best full back, has decided to join us at Worcester Warriors.
"We've made no secret of the fact that we want to strengthen the team through the acquisition of world-class players and by grooming our own young players through our Academy structure.
"With the arrival of Chris Latham and the re-signing of Chris Pennell it shows we are determined to develop both strategies."
Latham added on the club's website, wrfc.co.uk: "My family and I are really looking forward to moving to Worcester, I am very excited about playing in the Guinness Premiership for the Warriors.
"I have enjoyed a wonderful decade of rugby with the Queensland Reds and the Wallabies. At this stage of my life and career I feel it the right time for both my family and I to experience new things and to give myself fresh and challenging goals, as I know I am yet to play my best rugby."