Ibanez can increase the value of the deal to approximately $4 million by reaching included plate-appearance incentives.
"He's a guy that has hit right-handers very well over his career, and can still play the outfield," Yankees manager Joe Girardi said. "I know that. He's still been a productive player. If you look at his last 10 years, how productive he's been, he's a guy that we definitely have a lot of interest in."
The Yankees had been pursuing Ibanez for weeks, but general manager Brian Cashman said that he needed to focus on unloading excess pitching before securing a bat.
They hit the first checkpoint late on Sunday as right-hander A.J. Burnett was dealt to the Pittsburgh Pirates for two Minor League prospects, opening the door for Ibanez's signing to move forward.
Cashman said on Sunday that the Yankees were looking for a left-handed hitter who could do damage against right-handed pitching, but also a player who could play the outfield in the event of injuries.
That moved Ibanez, 39, ahead of other free-agent choices like Johnny Damon, Vladimir Guerrero and Hideki Matsui, all of whom expressed interest in the Yankees' vacancy.
Ibanez played 134 games in left field last year for the Phillies, batting .245 with 20 homers and 84 RBIs in 144 total games. Regarded as a good clubhouse influence, he struggled against lefties but posted a .256/.307/.440 line against right-handers.
With Andruw Jones already on board to mash lefties and with the possibility that Ibanez's power numbers could be helped by Yankee Stadium, that track record proved to be good enough.
Ibanez has played 16 seasons in the Majors since seeing his first big league callup in 1996. A lifetime .280 hitter with 252 career home runs, Ibanez played two stints with the Mariners (1996-2000 and 2004-08) and has also suited up for the Royals (2001-03) and the Phillies (2009-11).
He had his only All-Star season with Philadelphia in 2009, batting .272 with 34 home runs and 93 RBIs in 134 games. That year, the Phillies won the National League pennant before falling to the Yankees in a six-game Fall Classic.
The Yankees also continue to have interest in re-signing veteran Eric Chavez, 34, who batted .263 with two homers and 26 RBIs in 58 games for New York last year. But the Yankees view Chavez more as a backup corner infielder and not as a DH option.
Speaking to MLB.com in Phoenix, Ariz., on Sunday, Chavez said that he was told by the Yankees to wait for the completion of the Burnett trade. Chavez said that he would be returning on a Major League contract, but estimated that it was only "50-50" that he comes back to the Yankees.
"I thought he was helpful for us last year when we gave Alex [Rodriguez] a day off," Girardi said. "It was unfortunate he had that weird (left foot) injury, but I thought he was really productive for us. I thought he played an outstanding third base, he was a good bat for us and he had some big hits for us."