The six-foot-one, 200-pound defenceman had 19 points (two goals, 17 assists) in 64 games with the St. Louis Blues last season. Colaiacovo, 29, has recorded 139 points (30-109) in 370 career games with St. Louis and Toronto.
He was drafted by the Maple Leafs with the 17th overall pick in the 2001 NHL Entry Draft.
The Red Wings also signed forward Justin Abdelkader to a four-year contract extension.
Abdelkader, 25, had 22 points (8-14) in 81 games with the Red Wings last season. The six-foot-one, 219-pound forward has 47 points (18-29) in just over three NHL seasons with Detroit.
He was selected in the second round (No. 42 overall) of the 2005 draft.