Earlier Sunday, the Avalanche inked veteran defenceman Scott Hannan to an $18-million, four-year deal.
The signings illustrate the Avalanche's desire to return to the NHL's elite after missing the playoffs last season for the first time since moving to Colorado in 1994.
Smyth was considered the most desirable forward available after Chris Drury, Daniel Briere and Scott Gomez signed lucrative multi-year deals earlier in the day. The 31-year-old will average $6.25 million per season with the Avalanche.
Smyth, who spent the first 11 years of his career with Edmonton, rejected a multi-year offer last February worth $5.4 million per season to remain with the Oilers. He was promptly traded to the New York Islanders for prospects Ryan O'Marra and Robert Nilsson along with the Isles' first-round pick in 2007, which Edmonton used to select defenceman Alex Plante.
Smyth, a two-time Olympian, had 36 goals and 32 assists in 71 games with the Oilers and Islanders.
Hannan, 28, had 24 points (4-20) and a plus-1 rating with the San Jose Sharks last season. He will earn $4.5 million per season.