It is the second time Hutch has attracted a record bid from West Ham - when Harry Redknapp bought him in 1994 - ironically seven years ago today - he cost £1.5m.
He left for Sheffield United in 1996 for £1.2m, before moving to Everton for £1m in 1998.
He joined Sunderland last year for £2.5m and was their Player of the Year last season.
Confirming the deal has gone through after a medical, MD Paul Aldridge says: "We are delighted that patience has paid off and that Don is returning to the club.
"We would like to thank Craig Brown and the SFA for their co-operation in letting us complete the transfer while he is on international duty with Scotland, and now we hope he will go on and play two very good games for them - and come back uninjured!
"Don has been very impressed by what Glenn Roeder had to tell him and has joined us for footballing reasons, despite what has been written.
"Although Don's wife is pleased to be back in the south, she would have stayed in the north east - or wherever Don's career took him.
"Don's signing underlines our determination to get the very best, and hopefully there will be more good news for our supporters in the not too distant future."